Auckland’s house price “bubble” has been in the news a lot lately. Stories such as this one suggest large profits are being made in Auckland’s property market. And this one, which suggests growth in house prices is outstripping growth in salaries.
The first story suggests that if you’re an investor, then you’d be a mug not to invest in property in Auckland. The second story suggests that if you’re looking to buy a home, then don’t delay because you will only see you get left further behind. Either way the message is the same: Get out and buy now.
Even if I find it unconvincing, many people do seem seem to believe this narrative. House prices have almost doubled since 2006, and the rate of increase has accelerated since circa 2012, as shown below. This also highlights how it’s a uniquely Auckland phenomenon.
The Reserve Bank seems to think this is an issue, and I tend to agree with their judgment. The reason the RBNZ are concerned, of course, is because rapid escalation in asset prices can be followed by rapid falls, which can in turn threaten financial stability.
In this post I want to look at some of the fundamental drivers of Auckland’s house prices. The key question is whether price rises are being driven by demand, supply, or both?
In this recent video John Key suggests that the Government views lack of supply as the primary issue. That is, the escalation in prices is being driven by a lack of new house supply, partly due to local government restrictions. Someone close to him may want to show him the graph below, as I think it might prompt a rethink (credit to Peter Nunns for pulling this together).
That is, we do not find a relationship between the elasticity of housing supply and changes in house price for 17 OECD countries in the period from 2000-2014. This suggests that increasing the responsiveness on the supply side hasn’t necessarily been able to reduce prices elsewhere in the OECD.
Now don’t get me wrong: I think a more responsive house supply is worth pursuing nonetheless, because it will result in more houses being brought to market when they’re demanded, and vice versa. But there’s going to be a lag between this policy changes designed to increase supply side and that supply becoming available. So while I support efforts to make our house supply more responsive in the future, this does not seem unlikely to keep a lid on prices right now.
Instead, it seems fairly clear that if (and it’s a big “if”) we want to prevent house price escalation now, then we need to address the demand side of the equation. In a future post I’ll look at potential policy measures, but let’s first identify and discuss some of the different demand drivers:
- Population growth is driving increased demand for owner-occupied dwellings: Auckland’s population is growing rapidly and this is largely good news, i.e. more locals are having babies, fewer locals are leaving (or coming home), and more migrants are choosing to live in NZ, especially Auckland. Reducing population growth is not really a viable proposition, as it basically means either making it less desirable to stay here and/or harder to migrate here. And it seems likely to be the sort of thing that risks over-shooting and heading into negative territory. Population growth does cause problems, but from what I can tell a lack of population growth would be even more problematic, and harder to turn around once it got started.
- Investment this seems to have two components, domestic and international. Domestically it seems like Auckland is attracting capital from around the country. This might be caused by some capital flight from Christchurch and/or a lack of population growth in many rural regions. International investment is likely being driven by increasingly liberalisation of capital flows, NZ’s open economy, low rates of property taxation (see below), and Auckland’s persistently high ranking in international liveability indices. Reducing demand for investment properties really requires policies that reduce the investment returns from property. This applies equally to domestic and international investors.
- Renters: The demand for houses is also affected by the number of people who are prepared to rent. Data suggests more people are opting to rent, which is indirectly serving to take demand out of the market for houses. In comparison to other countries NZ seems to lack long -term protections for tenants. It may be that increasing protections for tenants, or creating a more long-term market for tenancies, would make renting more attractive and in turn help to take heat out of the house market. In this context, it seems to be an odd time for the Government to use KiwiSaver to deliver subsidies to first home buyers (and thereby stoking demand).
For now it looks like the Government is not prepared to make a move on demand; I find their reluctance perplexing for one main reason: New Zealand collects a relatively low share of tax revenue from property compared to other OECD countries. Research by Arthur Grimes and Andrew Coleman (usefully summarised by Interest.co.nz) suggests New Zealand collects 5.7% of our taxes from property versus 8.3% for the OECD. In this context, it seems highly plausible to suggest that some of the demand Auckland is experiencing may stem from relatively low rates of taxation on property.
In my next post I’ll look at potential demand-side policy responses in more detail. But for now I’d like to hear your thoughts; these issues are complex and I don’t pretend to have a monopoly on knowledge and ideas, in fact far from it.
Processing...
That graph is interesting but very few data points sit along the line suggesting a large amount of variability in the data set. It would be interesting to gave a closer look at some of the outliers because it does appear in some cases, supply really matters (and vice versa).
I’m also not sure about the oecd criterion (why was this chosen etc.)….
Re OECD: Probably that’s what data was available. Regarding the data, I think the more interesting thing is that those with high elasticity tend to have lower house prices, but the more interesting ones are those with low elasticity and low price increases (bottom left) compared to those with similar elasticity but high price increases (top left). What is it with those countries that lead to differing outcomes, and what can we learn from them?
(i.e. clearly driven by variables other than supply elasticity, so what are they?)
The paper that I drew the figures from is here; see Table 3: http://www.oecd-ilibrary.org/economics/the-price-responsiveness-of-housing-supply-in-oecd-countries_5kgk9qhrnn33-en
And the house price data is from the Economist’s nifty online chart: http://www.economist.com/blogs/dailychart/2011/11/global-house-prices
One of the “outliers” is Germany – a really low supply elasticity, and they’ve seen hardly any real house price rises (or price volatility) since 2000. On the other end of the spectrum, the US has the most responsive housing supply, but it also had a massive bubble and bust in the 2000s. It’s quite hard to draw clear policy lessons from this data, except possibly “supply elasticity doesn’t matter as much as we think it does”.
Cool I’d the rsquared figure variance explained? I.e. did you do a linear regression?
The graph may be misleading as there is a lag between policy changes and house built.
Also while unrestrictive policy is the gate, but for development to go ahead, developers must also find a margin to execise. That margin depends on construction cost and capital cost and that varries country to country.
Should it not also be seen as a failure by the current government to do anything in the regions?
Here is a dissenting voice on the idea that the current housing boom is a big threat to financial stability (from a former senior RBNZ staff member):
http://croakingcassandra.com/2015/04/15/housing-and-the-deputy-governor/
Basically we haven’t had particularly high credit growth over the last few years, and this is generally a prerequisite for housing related financial instability. He has a few other related posts up which are interesting.
However, tax on imputed rent for unleveraged owner occupier, coupled with tax deductibility for interest would be one step. The other would be only allowing the real component of interest costs to be tax deductible would be another. CGT is a highly cyclical tax and there is a good argument that capital gains are a form of double taxation. So those would be my preferred methods.
Really useful article thanks.
‘tax on imputed rent for unleveraged owner occupier’ sounds like a call for higher Local Authority rates!
It would be about as popular! I think it is justified in the sense that unleveraged owner occupiers currently have the greatest tax advantage out of anyone in the housing market. But yeah, its never going to happen.
“Reducing population growth is not really a viable proposition, as it basically means either making it less desirable to stay here and/or harder to migrate here. And it seems likely to be the sort of thing that risks over-shooting and heading into negative territory. Population growth does cause problems, but from what I can tell a lack of population growth would be even more problematic, and harder to turn around once it got started.”
Only in regards to highly skilled migrants. In reality we get a very large amount of migrants that don’t really add to the NZ economy in a substantial positive way with many actually being a net drain. Does NZ really need foreign real estate agents to sell our houses to China? No.
Do we need more taxi drivers, cheap nasty bakeries, dairies, retail workers? No. None of these are skilled work and yet we have thousands of immigrants coming here to do this. All that does is put pressure on the housing market (as most want to live in Auckland) Doesn’t help congestion (rarely see Chinese etc besides students on buses, rather they are driving around blocking up the roads in big SUVs). Turn the taps off to low quality immigration and it won’t hurt NZ and will actually benefit the country.
I disagree. Nz has fairly high skilled migrant flows. And i think it would be damaging to turn it off, especially in long run and especially fir regions outside auckwood whose populations are flat or falling.
Considering that a recent survey of “students” here on student visa’s showed that the majority are using it to live and work here and to eventually apply for residency (and no not in fields where we have labour shortages).
in a country whose overall population is ageing, the fact that young people want to live here is a real advantage as they’ll be paying our super when we retire.
And the fact they’re prepared to study (and pay the associated international fees) suggests they’re quite committed to living here. I saw “welcome”.
I think the conversation about population growth needs to be had, rather than just treated as inevitable. I don’t think there is much argument that immigrants add value, and as you point out, one imports young people (educated at some other country’s expense) to pay for the older people. However, that rather looks like a pyramid scheme.
So you are saying young educated proactive migrants are working hard to live here permanently. Great!
What do you mean no Bruce? Are you going to start driving a taxi or running a dairy? Like it or not we have a service sector that more or less only gets staffed by migrants.
What do you say to the residents here who are being locked out of housing by the inflow of migration? Hard to see any plus side.
what do you say to the people who are selling property to the highest bidder, as is their right?
Do you say: You have to sell your property to someone local who is not prepared to pay as much as someone overseas? In doing so you’re simply transferring wealth from locals who are selling property to those who are buying.
If that’s your objective, then that’s fine – but the impacts need to be clearly acknowledged. E.g. people who have invested in property as a means of saving for their retirement will have the value of those arbitrarily reduced.
If the floodgates weren’t open then there wouldn’t be the opportunity to sell at these ridiculous prices. People wouldn’t need to borrow so much and would pay their mortgages off faster then be able to direct money into savings for their retirement etc, investments and this would actually go into productive businesses and actually grow our economy (providing jobs and income).
This is a classic example of how economics and politics can’t be separated – although that’s what neoliberals having been doing for the last 30 years with the disastrous results whether environmental, social inequity, you name it.
I strongly believe that investors should not be allowed to invest in a way that locks NZers out of a basic need – housing. And saying its ok because they can rent is elitism. Funny you should speak of retirement, what will the whole generation that have been locked out of housing do when they reach retirement age and need to continue paying rent till they die. So, I’m sorry but those supporting the current model need to do some thinking about the “clear impacts” of their actions.
Oh and while we’re considering the poor investors who can’t sell at such inflated prices – what is the economic benefit of all NZers simply working to pay off their mortgage? Think of the lost consumption and general quality of life of having a large chunk of Aucklanders paying mortgages that are 50% or more of their incomes!
The guidance systems on your housing anger missiles have gone awry.
Read this carefully: I agree we need to target people who invest in housing, as will become clear in the next post. I just don’t agree that in doing so we need to distinguish between domestic/foreign investors.
In response to Realist: “I strongly believe that investors should not be allowed to invest in a way that locks NZers out of a basic need – housing. And saying its ok because they can rent is elitism. Funny you should speak of retirement, what will the whole generation that have been locked out of housing do when they reach retirement age and need to continue paying rent till they die.”
I think you have to prove, rather than assert, that it is desirable to maximise home ownership rates. I hear a lot of emotive fantasies about the benefits of property ownership, and not a lot of hard analysis. Why wouldn’t it be better to accept reality – which is that more people are renting – and adopt best practice tenancy laws?
Ultimately, investment in housing – whether in the form of an owner-occupied house or a rental property – is just another asset class. Saying “we all need to own homes for retirement!” is not, to my mind, any different to saying “we all need to invest in Kiwisaver for retirement!”
Because the current ridiculous house prices are affecting the decisions that people would otherwise make. If house prices were within 4 – 5 times people’s income I doubt you would see home ownership rates falling in the way you are now. Rather than consciously choosing to be renters they are being forced to be renters. Yes you can change the tenancy laws to give greater protection, but I doubt that would really become a more attractive form of tenure than ownership. There is a cultural bias at play.
Again, you have to prove, rather than assert, that there is some social benefit to maximising home ownership rates. Why is home ownership a relevant outcome from public policy when overseas holidays (another expensive but desirable good) _aren’t_?
Appealing to vague and unquantified cultural preferences does not count.
Like most “rights” it is one that comes with restrictions. We routinely regulate markets and we already do so in the property market, e.g, building consents, height restrictions, etc. I don’t think I’d have a problem regulating away an unearned windfall, if the alternative is inequity, and a poorer economic outlook for everyone.
Where us your evidence for this?
> Are you going to start driving a taxi or running a dairy? Like it or not we have a service sector that more or less only gets staffed by migrants.
Although there’s a lot of value from immigration, the “immigrants do jobs Kiwis won’t do” argument is just rubbish. The service and agriculture sectors are staffed by migrants because the pay is appalling. The pay is appalling because… there’s vast numbers of migrants in those industries competing for all the jobs, driving down wages.
It’s not a given that we “need” migrants for these jobs, it’s a conscious policy tradeoff that governments have chosen to make: help out certain businesses with artificially cheap labour, hoping that the benefits to New Zealand businesses will outweigh the loss of jobs for New Zealand workers. It’s entirely possible that this is a good move overall, in helping New Zealand businesses compete with other countries, but it’s not a necessity. Without immigration, Kiwis would do those jobs at higher wages, and there’d be fewer of those jobs because the economy would rebalance away from those industries.
Shoot, if that were to happen, I’d hate to know what I’d have to pay for an apple at the supermarket!
We already have people doing this. There are 20,000 people moving to NZ from India and China alone (not to mention more from Philippeans, etc) and most of them are settling in Auckland!. Look at Australia, there are a lot of non-immigrant taxi drivers there (ok some of them are quite rude etc but that’s besides the point). There are plenty of people already in NZ for these non-skilled jobs. Bringing in more unskilled labour only results in lower wages, what we need is highly skilled migrants that will add to our production and manufacturing, IT, IP economy.
Nice writeup. One minor typo: “this does not seem unlikely to keep a lid on prices right now” should switch “does not seem” to “seems” or “unlikely” to “likely” 🙂
Thanks and yes wellspotted. K
Just on bus now will fix typo once im off.
Auckland’s property boom can be viewed as a stimulant for the regions if this article in the Herald represents a widespread reaction:
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11435225
I think it’s great if people who want to live a rural or semi-rural way actually go to countryside to do it, driving commutes from Kaukapakapa to Devonport are nuts, it’ll be great to have these people off streets and roads in our biggest city. Auckland is no longer a little provincial town were it is viable to be in the countryside one moment and downtown the next, but there are plenty of other places in this beautiful country where this balance is more than viable. Of course you won’t get the big city advantages, but apparently lots of people are interested in that anyway, or so they say [yet they keep coming here].
Had to laugh at that, the folks they could find doing a tree change from the big smoke to the country were people who already lived in the country who were moving back to another country area where the wife grew up, after deciding to give up on their navy careers.
As for the lack of regional development I mean the lack of new jobs being created in the smaller centres. i.e. professional jobs in Tauranga, Hawkes Bay, Taranaki, etc.
Cashing out of Auckland and retiring to the boonies, whilst nice for some, is not long term development. Where is the employment creation? There seems to be very little thinking in terms of improving the lot of the provincial cities, and it does seem Auckland needs a safety valve.
What do you suggest? Forcing all banks to choose a different small provincial town to base their headquarters? The ANZ in Te Kuiti for example, the ASB in Geraldine?
For decades and decades government jobs were spread around the country, in an attempt to ‘stimulate’ the regions, IRD to Manukau and Hamilton, TV to the Hutt Valley etc… hard to believe it did much for the talent in these offices, but perhaps it did something for the local lunch bars.
But now we no longer have government jobs on any scale to send anywhere, nor do we have a government building pulp mills or methanol plants; so how do you suggest government ‘does something’ to make the regions compete with where the jobs are, and are likely to be, except by being cheaper and offering a slower less urban life? [other than build huge highways so they can leave more easily]
I dunno. research centres, business parks. Decentralisation of more government roles out of Wellington.
Developing passenger rail on existing lines in regional centres. Encouraging companies to send some of those jobs elsewhere. If commuting takes an hour or more to get to an Auckland job, yet would be 10 minutes in a regional city, why live in Auckland? If a house in Auckland costs more than double an equivalent house in another city, that is many, many less years with a huge mortgage.
A big shout out to employers – lifestyle can trump agglomeration. Agglomeration is overrated with modern telecommunications. Come on have some regional offices.
Anecdotally, there does still seem to be a slow down of professional jobs in places like Nelson and Palmerston North.
All the pumping up of the Auckland economy whilst the rest of the country is flat at best does not seem to make any sense, to me at least.
“an hour or more to get to an Auckland job, yet would be 10 minutes in a regional city, why live in Auckland?”
“lifestyle can trump agglomeration. Agglomeration is overrated with modern telecommunications. Come on have some regional offices.”
Do you think that these decisions are being made without this information? Do you think when ASB built its HQ in Wynyard Quarter that the board didn’t consider all these factors?
Of course they did and they still made that decision. That tells me that the market disagrees with you and what you see as obvious is simply not regarded as true by the market.
It seems that people do think the commute is worth it, or they choose to live somewhere where the commute isn’t that bad. For example, I have a great 20min commute by bicycle and ferry from the North Shore.
Telecommunications are all very good, but there is no substitute for meeting face to face and there is no doubt that a lack of easy interaction holds back creative, problem solving industries. These thrive off day to day, accidental interactions.
I have a small house, one car and no boat (and no desire to have one). I don’t think my children will grow up into terrible people if they grow up in the city. I am happy with the many, many parks around my area and I don’t see the need to live some pseudo rural lifestyle (ironically one that is far more damaging to the environment) where I pretend I am a farmer – while making my living in the city.
This is called urban life. If you make that choice life can be good in Auckland – the problem is trying to live a rural life while making your living in a big city. The worst of both worlds.
“Agglomeration is overrated with modern telecommunications.”
Factually incorrect! All of the research on the subject suggests that ICTs have in fact _strengthened_ agglomeration economies by making it easier to sell services across longer distances. This means that service firms/units, such as bank headquarters, software companies, or providers of business services, have stronger incentives to locate in places which offer advantages in production rather than locate near every cluster of customers.
That means locating in cities – places where labour and factor markets are thick and knowledge spillovers are more readily available – and serving customers in small towns via the internet or by flying in occasionally.
Finally, we used to have a range of costly regional development policies, and they didn’t succeed in reducing Auckland’s growth rate: http://greaterakl.wpengine.com/2014/08/29/new-zealand-cant-put-the-urban-genie-back-in-its-bottle/
“I dunno.”
That pretty much sums up the ‘we should develop the regions’ actual planning.
Unless someone can actually come up with a workable plan (and I can’t think of anything that would be such) we need to focus on making what we have work- that is a successful city with quite a few growing pains.
The corporations are just following the market. Believe it or not, people love the lifestyle, that’s why they live in Auckland, and that’s why there is an international trend of people moving into the cities. The urban life is expensive, time consuming (commute depending where you live), but the lifestyle is just that good. If the corps want to attract the best talent, they have to go to where the best talent work and play.
“A big shout out to employers – lifestyle can trump agglomeration” …except that lifestyle benefits from agglomeration. Your assumptions seems to be that lifestyle and cities are polar opposites, but for many the opposite is true.
Sure for some people “lifestyle” means having no people around and being in the countryside, but for may lifestyle is comprised of things that you only get in big cities. For example, tours from international musicians, stage shows etc, a variety of restaurants of different types and price ranges, comedy festivals, nightclubs, theme parks, even shopping and superyacht races. Or museums, art galleries, swimming pools and indeed parks, playgrounds, reserves. The more people you have around the more of these you have and the better they are, because there are more people to share the cost of them.
> Sure for some people “lifestyle” means having no people around and being in the countryside, but for may lifestyle is comprised of things that you only get in big cities.
For many people, the idea of “the city” is a dystopian terror – but some of us actually like it here, and don’t want the government trying to destroy our urban centres in the name of “regional development”. The idea of some sort of Year Zero-esque policy to force people out into the country is both scary and nuts.
“the Government views lack of supply as the primary issue.”
As the *only* issue. They continually refuse to countenance that there are any other answers, even when confronted with them.
“Reducing population growth is not really a viable proposition, as it basically means either making it less desirable to stay here and/or harder to migrate here.”
Or migrants are directed to places other than Auckland. Canada has a history of such schemes that seem to work there. See for example http://albertacanada.com/opportunity/immigrating/ainp.aspx or http://www.economy.gov.sk.ca/immigration/sinp .
Many cities have tried that, which effectively amounts to either subsidising migrants to go where they don’t want to go, or banning them from going where they do want to go. End outcome is the migrants do the bare minimum stay required in the undesirable area, then move to the big city they wanted to be in in the first place at the first opportunity.
Which still helps keep them out of where they aren’t wanted for a period of time and during that time it is likely that at least a percentage would settle where they locate to so yes it does work to a certain extent. A ban on living within 150km of Auckland CBD for immigrants that don’t meet certain criteria would help.
Barbed wire too? Internal passport…. what else?
Ankle GPS monitor. Stop them from coming near the place. Give the otherwise completely underworked police something to do.
FORTRESS NEW ZEALAND.
Do they use barbed wire or internal passports in Canada? No? Of course not but then you were being facetious I suppose.
If we’re supposedly 30,000 behind on supply and we’re letting in 50,000 net a year but only building 8000 houses…
So many people see immigration as an emotive issue, when the numbers simply don’t add up. Why allow immigration at a rate far higher than houses are being built, when you are ALREADY 30,000 behind.
Its just stupidity of the highest degree.
National, or whoever is in government, should be there to actually GOVERN in the interests of the country rather than sitting on the sidelines doing absolutely nothing.
why? Because a larger, younger population is in the long run interests of the country.
Yes it places short term pressure on housing, but its in in our interests to develop policy tools that maintain fiscal stability (and control prices) without turning off the immigration tap.
In the long run Stu? Rubbish. “Growth” is actually killing the planet, as human activity expands well beyond sustainable levels. The insidious “growth is good” mantra needs to end, and globally.
Immigration needs to be capped to what the country can actually accomodate, and within the country needs to be capped in each region to what it can accomodate.
As to the assessment that immigrants “want” to live in Auckland – I would suggest most get caught up in the same issue facing New Zealanders – the continued shafting of the regions by big business in favour of centralising in Auckland, causing artificial demand to be there, because that’s where the jobs are.
Most economic indicators show that New Zealand families were better off when manufacturing was spread nationwide. Wages were higher and things like owning your own home were not a challenge. Perhaps not better for big business, but much better for people.
Auckland is a good example of what happens when development ceases to be about people, and becomes about what is good for big business (the agglomeration benefits rubbish). It creates all sorts of issues, from high house prices to traffic congestion, and passes off the cost to society, while the benefits go into off shore bank accounts.
We’ve gone down the wrong track, and it’ll be interesting to see just how far we go.
The only thing that’s “gone down the wrong track” is your understanding of economics. Urban living tends to be more environmentally sustainable than rural/exurban living due to economies of scale and density: http://greaterakl.wpengine.com/2014/10/31/climate-change-and-new-zealand-cities/
As for this statement: “Immigration needs to be capped to what the country can actually accomodate”
Based on that policy recommendation, New Zealand should prepare to accept a few tens of millions of immigrants from Bangladesh. We’re pretty ludicrously underpopulated relative to some countries that face much larger environmental challenges.
Peter, I didn’t mention rural living. Or is it that you regard everywhere outside Auckland as “rural”? Most New Zealanders live in urban settings, and mostly in towns and cities. But generally they have planning rules that prevent Auckland’s problems from developing. In Napier for example you can’t build a high rise building. So there’s no demand there to build motorways into the city and there’s no demand for space in a small confined area which is what happens when you cram too many jobs into that small space. The end result is most houses are under $300,000 and the quality of life is significantly higher. Fresh air, jobs that pay about the same as anywhere else, no congestion or transport issues, low rates and an ability to spend rates on things people really want, like extensive cycleway networks.
Geoff your grasp of the forces that drive urban form is woeful. It is not planning regs that prevent small provincial towns from building towers but the economics of scale and demand. Napier does not have anything like the pressures on land use that Auckland has simply because of the scale difference. Additionally I don’t know when you last went to Napier or if you had your eyes open when there, but Napier has been intensifying quite a bit recently, including building and converting apartments especially at Ahuriri. These are of course on a smaller scale than in Auckland but are certainly the beginnings of the spatial logic of cities becoming evident, and are indeed several stories high. Even though Napier is really very small.
I can remember when no one lived in anything but detached houses in Napier and the commercial and residential areas were clearly separated.
Patrick, I didn’t say otherwise (or even mention) about apartments in Napier. Yes, I’m very familiar with Napier. I also know the CBD prohibits high rise buildings (tall office towers etc), and that each time the likes of a big box retailer wants to set up, it must be demonstrated that existing roading infrastructure can cope, or the project is not permitted. The result is that the number of traffic lanes into the Napier CBD in 2015 is exactly the same as it was in 1975, and they all remain congestion free.
We need high immigration for John Key to be right about the govt not having to raise the super age…
Well I look forward to your post tomorrow. However as a short term measure, turning off the immigration tap for 5 years or so seems a no brainer – with the exception of skilled migrants.
Get us to a point where we are building 10,000 houses a year and have no housing shortage, then turn the tap back on.
capital is the primary problem, not people.
We have enough housing for our population; we don’t have enough houses for our capital.
Because we are kiwi’s, and we don’t discriminate, and we don’t bash immigrants that want to live in our great country and great city, because we have moral obligations to accept everyone. Maybe we are just good people and treat everyone fairly? Instead of banning people on migrating (which the vast majority of population growth is natural increase and domestic immigration).
If that’s your solution do we need to stop domestic immigration and stop people reproducing too?
I would rather try solve the problem by actually building more houses, even if it requires lifting height restrictions.
> because we have moral obligations to accept everyone
Are you being sarcastic?
Auckland seems to have a much larger premium for stand-alone houses relative to apartments, compared with Australian cities. Is this premium based on greater expectations of future capital gain for houses than for apartments ? Or is it because banks require lower deposits for houses than units ? Once the market realizes that salaries are unable to cope with the higher prices, a fall is to be expected apart from a few premium suburbs.
In Melbourne much of the new apartment supply in the CBD is from overseas investors buying off the plan. While this form of accommodation is only suited to a portion of the market, it certainly provides an alternative to the ‘burbs.
Banks have in the past, and still are, quite hesitant on lending to apartments. The leaky building situation hit the market massively which has definitely slowed the uptake even today. Some banks are getting better, especially for new builds, but still very cautious unlike for free-standing homes. Some of the main centre’s still have a bit of growing to catch-up to house prices in Melbourne, Sydney, London etc, however it’s at the lower end where Auckland’s prices are quite high, I think this also has something to do with NZ’s fondness of house ownership, we have a very high owner-occupier rate which probably helps boost the lower-end housing prices up, and therefore the average, although our owner-occupier rate does appear to be changing as per international trends.
Some banks require a 40% deposit on apartments, has a lot to do with the size from what i can ascertain (im looking to buy an apartment myself).
The huge deposit on apartments has a lot to do with the risk around ground rents on leased land. If the ground rent rises by a large amount each 7 years (or whatever the period is) the price of the apartment tends to take a big hit. The bank is estimating how big that hot might be….. And 40% or 50% appears to be their bottom line. If the price goes down, it’s the owner who stands to lose….. Not the bank.
There are large quantities of apartments available on freehold land.
Nah nothing to do with leasehold land. Banks will factor leashold separately, whether apartment or house. Most apartments are freehold FYI.
That doesnt explain high deposits required for apartments on freehold land, which is quite a lot when I was looking. I brought mine not long ago.
Paying cash for a house – full price – will likely earn a reasonable return. Such a buyer in the Birkdale / Beach Haven area would have made a healthy 40% on properties in the mid-to-low end of the price ranges in those areas.
But if you borrowed 90% of the money,big chunks of any returns will have gone to the bank before the property is resold and the capital gain realised. As is idly the case, the people with lots of money already will usually make the most in terms of profits.
That is exactly how it doesn’t work.
Let’s say you bought a house for $100,000 and interest rates are 10%.
You hold the house for 2 years and sell it for $150,000
If you pay the full price in cash you make a 50% return on capital invested.
If you pay a 10% deposit and borrow the rest you make the following return:
$10,000 down
2 payments of $9,000 for interest (let’s assume this is an interest only loan to make this easy), so $18,000
Your return is $32,000, which is a 320% return on the capital invested.
Steve – as conan said. For the full details of just how this works – http://en.wikipedia.org/wiki/Leverage_%28finance%29
This is why housing market corrections are so feared: leverage multiplies the losses as well as the gains. You can end up not just losing all of your investment but actually end up owing money with no asset to show for it.
Fair enough. I’ve had two family members go bankrupt (separately) leveraging like that, so I’m risk averse. I have 70% equity across 3 houses. The market can tank….and I only stand to lose some money…..maybe…(not everything). I won’t be the richest guy around….but I’ll still be around.
As for the share market….I’d rather bet on horses. No wonder Kiwis invest in real estate. It’s the “real” that gives it weight.
Love the lively debate on this post 😉
Rather than looking at growth in Auckland versus the rest of the country, a better way may be to consider NZ as a whole, as a city state of 4.5 million with a range of productive ‘burbs ready to export.
I guess if ‘lively debate on this post’ includes a load of ignorant nonsense about ‘rural life-stylers’ then you’re right.
Correct me if I am wrong but the price of housing works the same as anything else – supply and demand. Auckland is far more attractive a place to live than many other places in the country or the world. If we are to get house prices down or at least leveled out then we need to address demand and supply. However, in reducing demand the real question is how do we do that without making Auckland a less attractive place to live?
This is of course will not be solved by one thing alone. I think the tax and investment side really needs to be addressed – that would make investing in Auckland housing less attractive but not necessarily the attractiveness to live and set up business etc here. Improving the regions would help too but that can’t come by hamstringing Auckland but actually making other cities better to live in. I think the universities must play a role in developing investment and innovation in their respective cities. If Dunedin or Palmerston North could retain a few of it’s students after graduation to develop new industries surely that would help. Immigration is an issue that has to be addressed. If we reduced the number of migrates by a little until the supply side of things increased then it would just take some heat out of the market.
I think the supply-side of things have been addressed here enough without me adding to it. But I find in interesting that the houses so many people want – such as Grey Lynn, Freemans Bay, and Ponsonby are actually unlawful to build now. If we actually want a city, and clearly we do, then many of the “Destiny Done Well” initiatives seem the only way forward – building another suburb with a mall in the country does actually make a city.
OK I have had a hard day where I had to think too much and I am struggling to figure out the graph. %change in house price index on the y axis is an indexed form of % change in prices. Price elasticity of supply on the x axis is presumable the % change in supply divided by % change in price. So with %deltaP on the y and %deltaP as the denominator of the x then a line through the data points is just %deltaS? Or in other words we are just looking at some changes in supply for various countries and we have no reason to assume they should correlate? Maybe I will try and figure this tomorrow.
I find it’s best not to think too much about econometrics after a long day at work. I _think_ what the graph’s saying is simply that there is no obvious association between national-level change in house prices and long-run elasticity of supply.
However, it’s hard to subject the data to a robust analysis simply because the same variables may appear on each side of the regression equation. I thought about adding in some control variables, such as population growth rates or home ownership rates, and concluded that I was probably on a hiding to nowhere.
Basically, the graph’s an enigma – totally counterintuitive, but it suggests that an answer _may_ be in reach if you could just drill down a bit further. Not unlike the Auckland housing market…
It’s best not to think about anything after a day at the Environment Court. Here is a slightly more coherent discussion of the graph. First I think the axes are transposed. They have x as a function of y so it would be easier to adopt normal conventions and rewrite it. Second ordinary least square fails if x depends of y, x must be independent. Third it is probably quicker to get there with calculus rather than some observed points. And finally without controlling for demand in each of these separate markets I am not sure we can conclude anything. Maybe they have different regultions preventing a market correction in some of these and not in others.
I wonder if the Auckland economy has reached a point of some de-coupling from the nation’s agricultural economic fortunes? It seems that changes in commodity prices, especially milk, aren’t as closely matched by cycles in Auckland’s performance? Is Auckland now much more it’s own economy, much less a service town to its hinterland, perhaps cos its largely been paved for suburbia.
Wellington has long been the most detached urban economy from the countryside in NZ because it runs on government business, but perhaps now Auckland has the mass and scale to supply its own engine?
I can’t recall a single decade since the ’30s and probably earlier, whereby housing in this country didn’t have a “crisis” either in the making, in full bloom, or we were just coming out of one.
Off the top of my head:
In the ’30s it was “The depression” and lack of private rental/affordable housing [- cue the State House for life]
In the ’40s it was “a war on”, with no resources except for the war effort, available, then returning soldiers from WWII coming home and needing housing to live in
In the ’50s it was the Post WWII Baby Boom and the ex WWII soldiers wanting to settle down and have families coupled with refugees from Europe and immigration from the UK and former Dutch colonies
in the ’60s it was the Baby Boom continued and yet more migration – this time from the UK, with the new sprawly ‘burbs being the place to be away from crowded, dirty, slum ridden cities
In the ’70s it was more UK Migration and then Oil shocks then rampant inflation followed by a big migration to Oz, impossible to get: mortgages, foreign exchange, or credit of any kind
In the ’80s it was Oil shocks, more inflation, price controls, wage controls, yet more Oz brain drain, think big, deregulated markets. farmers losing subsidies, easy credit, 20% interest rates, booming share and house markets, asset stripping
In the ’90s it was economic stagnation, and inflation, and massive migration from Asia due to the pending handover of Hong Kong to China
In the ’00s it was 9/11 with economic downturn, a mass migration of ex-pat Kiwis coming home from Europe and elsewhere ,a leaky building crisis, post 9/11 rampant property prices, deregulated building sector, followed by GFC
In the ’10s it is well all of the above in various proportions. Take your pick of any or all of the above.
In the ’20s? Well likely more of the same at the rate we’re going.
Each and every one causing a housing crisis, a shortage, house prices to rise unsustainably, or too unaffordable, or whatever you call it.
See the pattern? History repeating itself. We lurch from one “housing crisis” to the next. Never seemingly learning the lessons and so repeating the same behaviour next time.
Each time the politicians act like this one is the only crisis we’ve faced in this area before, and therefore “its no surprise we don’t have all the tools we need to deal with it as its a once in a generation thing”.
Yeah right. End result, the hard decisions that should be made to deal with the underlying issues don’t get made, and so the pattern repeats.
Need a different approach as the current one is obviously not working – or (depending on your viewpoint) its working so well, its become 100% predictable.
Either way, not good.
Well Stu and Peter Nunns etc seem to love their data. Would be good to see whether we’ve had house price inflation like we’ve seen since 2003 in any other time period. Houses that have tripled in value in the space of ten years!
In the past much of the demand was hidden and access to resources (money, land, construction equipment, planning regs) to build,rent,own houses and what you could earn or pay for houses was controlled by government agencies (more central than local), so the current “unfettered” market situation of rampant demand and limited supply is not the same as it was in previous decades.
But, in previous times there were import licensing, tarrifs protection, subsidies and vehicle import regimes, immigration quotas, if you were on the inside/right side of these you profited handsomely, at the expense of those outside.
But the statistics then and now would be reasonably blind to that.
Especially if it was (as this one is), a regional issue.
“Well Stu and Peter Nunns etc seem to love their data.”
Maybe you think that’s a good put-down, but we’re economists, so thanks for the compliment!
I’m unable to answer your question as I don’t have a time series of Auckland house prices going back 170 years. The most long-term data I’ve seen for NZ as a whole only goes back to the 1960s. See the RBNZ data here: http://www.rbnz.govt.nz/statistics/key_graphs/house_prices_values/
However, historians working on the subject (e.g. James Belich, Replenishing the earth) do state that land price booms were an endemic feature of colonisation in the 1800s, so it’s likely that we did experience a few periods of explosive growth back in those days.
My land lady tried to sell her West Auckland house at its valuation of $265,000 and it did not sell. The highest offer was around $230,000. Auckland Council have now written to her to advise the house has been revalued to $400,000.
Auckland’s house prices are fictional, driven up not only by speculation, but also by an economically reckless council desperate to justify rate increases.
When the crash comes, it will be spectacular.
Really? I’ve been receiving unsolicited offers way above council valuation for my places!
Perhaps you live in one of the areas where prices have been driven up by artificial demand? We don’t have that problem out here on the fringe, so everything is much cheaper and demand a lot less, as it should be. The only negative is difficulty with selling when you want to, and the council issuing false valuations to drive up rates (something that the government should really intervene over).
Geoff, sounds like you don’t understand how rates work. Even if there was some conspiracy to drive up the nominal value of properties that wouldn’t get the council any more rates because the council budget isn’t based on property value.
How it works is the council sets its operating budget at whatever it thinks it needs to be, then divides that across all ratepayers with each proportion based on the value of their property.
If the value of a property goes up the council doesn’t get a single dollar extra, because it’s just the proportion that shifts. Your share might go up but every one else’s goes down a tiny bit. If all properties go up then the proportion doesn’t even change. To reiterate the value of any property absolutely nothing to do with setting the council budget or how much rate income they get.
So sorry, you’re quite wrong about “issuing false valuations to drive up rates” because that is simply impossible.
One thing to note is that the council valuation isn’t precise for every single home, it’s more like an average for a particular home type and land size in a given area. So sure, the CV could quite easily be wrong. If your landlady is having trouble selling at CV then it’s probably just that the place is actually below average for the area, or maybe people just aren’t looking to buy in that area at the moment at any price.
You know that everyone has the right to dispute their statistical valuation and have it inspected and valued specifically, if they think it is overvalued they can get it assessed. I’ve done mine like that.
‘Twas ever thus; the Auckland we see now is more the result of a persistent and encouraged culture of rampant land speculation than any plan or design:
‘It would be fair to describe speculation in city and suburban land as the most ubiquitous of nineteenth century Australasian vices. But Aucklanders won the reputation – which persists to the present day – for being primarily concerned with the pursuit of money unhampered by a rigorous commercial morality. No unction from above could sweeten the harsh business of the northern city’
Professor Stone. Makers of Fortune: A Colonial Business Community and its Fall AUP 1973
Interesting to note Auckland Council’s contribution to the Supply side in The Aucklander http://www.nzherald.co.nz/aucklander/news/article.cfm?c_id=1503378&objectid=11434895 . One aspect of the supply of housing that is ignored when people talk about new housing nits being built is the number being demolished and otherwise removed by converting into offices, museums, crèches, and cafes.
It would be interesting to establish how many homes Auckland Council, and the Government mainly in the form of NZTA, have demolished and otherwise removed from the housing market in Auckland. One thing is clear, when there is a low rate of building new homes you do not help supply by demolishing homes to make way for a car park, or even more parkland. Auckland needs more homes rather than more parks.
Certainly needs more dwellings than carparks. This is minimums gone made again. There is however a force in the other direction too. Commercial spaces being converted to apartments, particularly along the Hopetoun ridge at the moment. This is not helping the supply of office space- ha! But is certainly helping the City Centre transform; it is the fastest growing residential area in the whole country:
> otherwise removed by converting into offices, museums, crèches, and cafes.
> Commercial spaces being converted to apartments, particularly along the Hopetoun ridge at the moment.
We talk a lot about “the housing crisis”, which is very real – but the shortage of decent commercial space is, if anything, even more dire. Simply by being zoned for commercial uses, regardless of its actual use, land gets two to five times more valuable compared to residential land directly adjacent to it.
Develop more desirable cities, or city centres; Takapuna, Albany, New Lynn, MC…?
http://cityobservatory.org/our-shortage-of-cities/