I was a bit surprised to hear the Property Institute of New Zealand warn of an “apartment bubble” in Auckland earlier this week. I was even more surprised when I read their press release. The CEO, Ashley Church, is predicting a bubble as a response to 1) banks being likely to decrease their deposit thresholds on apartments from 20% to 15%, and 2) the Reserve Bank potentially bringing in “loan-to-income restrictions”, where mortgagees would then only be able to borrow X times their income.
The press release then gives a hypothetical chain of events:
1. The Reserve Bank restricts mortgage loans to a percentage of household income – effectively making the purchase of freestanding residential homes almost impossible to all but the very wealthy.
2. With median household incomes of just $76,500 – home buyers flock to the apartment market to find properties which comply with the new rules.
3. The relaxed deposit rules, by the major banks, allow buyers to borrow a little more if the apartment is new – (on average, a little over $400,000 if we adopt the Brit formula) – and this combination fuels a new wave of apartment building and streamlined marketing programs designed to entice buyers.
4. Property Investors – many of whom have also been caught by the new rules – also start buying apartments in large numbers.
5. The combined effect of this new wave of buyers quickly pushes up the price of apartments – fuelling an ‘apartment bubble’.
6. Perversely – the quality of new apartments suffers as developers focus on the ‘low-end’ of the market so as to appeal to as wide a range of potential buyers, within the Reserve Bank rules, as possible.
7. Meanwhile, the cost of renting free-standing homes in Auckland also increases as demand outstrips supply due to the absence of traditional property investors buying these types of properties.
8. Within 7 to 10 years Auckland becomes a highly ‘intensified’ city with large numbers of low quality apartments dotting the landscape and free-standing residential homes becoming the preserve of the well-off and wealthy renters.
However, this chain of events misses out half of what defines a bubble. He’s postulated a rise in prices, sure. But where does the subsequent decrease happen? To me, this sounds like a recipe for a one-off, permanent increase in apartment prices. A permanent shift in the demand curve, as it were. I’m not making any predictions on apartment prices, I’m just pointing out that the chain of events here doesn’t actually include a drop in prices, and therefore isn’t a bubble.
Moving on from that (rather important) point, there are a lot of other strange things in this press release. Firstly, it seems a bit far-fetched that the Reserve Bank would impose harsh restrictions to the extent that only “the very wealthy” could afford freestanding homes, and the press release also ignores the price response (i.e. prices would drop, and many people would still end up in those homes – there aren’t enough “very wealthy” people to fill them all up).
Secondly, if the Reserve Bank is going to clamp down on Auckland home loans, it’ll be because they’re worried about a city-wide bubble. I’d say this is a much bigger concern than an apartment bubble – it’d affect a lot more people.
Point 7 is one I’ve been reading a few variations of recently, which doesn’t follow from economic intuition. If landlords drop out of the market, do rents to rise? Given that each landlord dropping out of the market means there’s an owner-occupier there instead – and therefore a smaller rental market on both sides – the effect on rents might go either way.
Points 6 and 8 in the chain of events are odd too, essentially scaremongering about large numbers of low-quality apartments. The press release continues in a similar vein:
Mr Church says that he is aware that a focus on ‘intensification’ through building more apartments is consistent with the Auckland Unitary Plan and that some might see this outcome as a good thing – but he notes that this provision is also strongly rejected by a large number of Aucklanders and shouldn’t be forced on the city by the Reserve Bank.
“The drive for Intensification is based on a political ideology and is rejected by a large number of Aucklanders. It should only happen if Aucklanders want it”.
It’s a strangely political statement itself, coming from an organisation which began as the professional body for valuers. The PINZ’s statement in March that “the Reserve Bank Governor needs to “stop chasing shadows and stick to his knitting” seems a bit ironic.
As an aside, I think it’s great that the banks reviewing their lending policies on apartments; after all, it’s a more established market now than it was ten years ago, and there’s (hopefully) a lot less speculation going in that market than there was in the mid-2000s boom-bust. The banks will still be cautious about lending for leaky or leasehold buildings, and perhaps shoeboxes, and once those are taken out of the equation the apartments that are left should have a manageable level of risk.
Processing...
Another free-market body that doesn’t understand the difference between “allowing” something to be done and “forcing” something to happen? Scaremongering indeed.
Also, Aucklanders voted twice for a course of politics that indicated intensification was a key component. So stop the “this has zero mandate” kind of bull.
Oh come now, these blighters are are anything but a free-market body. It’s classic rent-seeking propaganda to promote nothing but their own interests.
More good apartments would be great. More low-quality apartments would not be great. It would be a good idea to have a rational policy and approach to arriving at the desired outcome. The market, on the other hand, may deliver something quite other….as we know if we have been watching for long enough.
However, this chain of events misses out half of what defines a bubble. He’s postulated a rise in prices, sure. But where does the subsequent decrease happen?
We build more apartments.
Postscript: the Reserve Bank not at all fussed about the trading banks’ plans, as you’d expect: “We’re happy for banks to manage their own risks within the framework we set – i.e. determine their own comfort levels for lending to apartment buyers”, an RBNZ spokesman told interest.co.nz..
http://www.interest.co.nz/property/76006/rbnz-watch-sideline-if-banks-loosen-lvr-restrictions-auckland-apartment-buyers
Yes I wonder why a professional body is choosing to be so political? Do these guys get less work out of the apartment market? Possibly, as it is easier to compare prices for apartments and less of a need for bespoke valuations?
And heaven forbid anyone focus on the low end of the market! The arguments about peole not wanting to live in apartments of a given size or quality are specious. They could equally be applied to the car market. Why do we allow used cars to be imported? Surely everyone aspires to own a nice new mid size sedan at least? We better ban everything else!
If anything, I’d think valuations would be more in demand for apartments. Valuers will have better knowledge than the average punter of what buildings have issues, what body corporates have issues, and so on. And investors make up a larger share of buyers than for standalone homes; investors, being all about the dollars and cents, would be more likely to get a valuation, I would think.
Valuers will also have information on things like floor area which are quite hard to get hold of for the average person. It’s easy enough to order sales data from QV or similar, and that works fine for houses when you’re looking at the street or area, but apartment sales comparisons aren’t much use if you don’t know their areas (and things like the number of carparks too).
They don’t want to pay for parking in the city?
Point 7 seems to be assuming that those people who are renting will both try and buy an apartment to live in AND will want to continue to rent a house? But if they move into an apartment they will no longer be renting a house so I fail to see why rental demand for houses will suddenly outstrip supply?
What we are experiencing, and what should be helped by the banks decisions on loans, is an apartment boom. Could it become a bubble? Well only if it over-inflates then demand shrinks. But there is little evidence of this sector of the housing market over-inflating unlike detached dwellings which have risen much more in value. It is very hard to support the conclusions of this document. Especially as the apartments I am seeing are mostly of higher standard than many of those built earlier this century in the last apartment boom. In fact it looks rather like the reverse is happening; this sector is maturing, getting depth, variety, and scale.
Funny the moral panic that goes on around other peoples’ housing choice. Apartments attract criticism for being too cheap or too expensive, almost simultaneously. This writer sounds like one of those suburban NIMBY moralisers who sees the world ending if others live differently to them in their city. Is nonsense.
A boom is not necessarily a bubble. And we need a building boom, especially in affordable dwellings. And apartments offer the most affordable dwellings. Cheap: isn’t that another way of saying Affordable?
So this is a good thing.
You’ve written a concise summary that apartment prices will fall and make housing affordable again, thanks to an impending apartment construction boom. If you buy an apartment now it seems highly likely it will sell for less in 3 – 5 years time.
Ashley Church (author of this report) agrees with you.
Investors buy stand alone houses for the capital gain, apartments for a rental gain. The rental yield on a stand alone house in Auckland is terrible. It is the investors buying for capital gain that cause bubbles.
2 – 3 years ago yes, but since then capital gains on Auckland apartments have been quite good.
Yes, capital gains on freehold apartments have been good but for leasehold they are not good, as generally they are a depreciating asset, with an increasing ground rent.
Their argument seems to be that apartments are bad because they are slightly affordable and to prevent a bubble we need to make sure we don’t build any dwellings that people can afford to buy. Or am I missing something?
“The drive for Intensification is based on a political ideology and is rejected by a large number of Aucklanders. It should only happen if Aucklanders want it” – if Aucklanders don’t want apartments then they won’t buy or rent apartments and no one will build apartments – we hardly need to put it to a vote, the market will decide. Or does he mean people that already own a house should be able to tell people that can’t afford to buy house that an apartment is not an option for them because they don’t like them?
Excellent comment.
Or does he mean people that already own a house should be able to tell people that can’t afford to buy house that an apartment is not an option for them because they don’t like them?
Newsflash – we do this already. We also say people that already own a house can tell people that can’t afford to buy house that a new suburb is not an option for them because they don’t like them.
This is Auckland, we have rules preventing affordable housing all over the damn place.
The author isn’t saying what should happen, he is predicting what is likely to happen.
No that particular comment isn’t a prediction, he is saying we shouldn’t build apartments because he and some other people don’t like them.
Agreed we do have too many rules preventing houses and apartments being built – sounds like this guy wants even more of them (the ‘don’t build more apartments because I don’t like them’ rule)
John, your criticism of point 7 is only one possible scenario. If the investor drops out of the market, either they’ve stopped renting the property out, either to live in, to leave empty or it’s a temporary removal (maintenance/renovations), or they’ve sold it either to another investor or to an owner/occupier.
In each each of these scenarios there are different effects, potentially the most harmful for the overall market is the sale to another investor, which taken to the extreme leads to the concentration of power.
Overall I’m intrigued about what sort of outcome PINZ are after. I agree with your assessment that NIMBY moralising masked as expert opinion isn’t particularly useful.
Fair enough, although of course I’ve written about the low likelihood of leaving homes empty (http://greaterakl.wpengine.com/2015/05/28/are-vacant-homes-adding-to-aucklands-housing-shortage/) and renovations would have to be quite major to keep a home empty for long.
I don’t think there’s much risk of the landlord market becoming more concentrated, i.e. fewer but bigger landlords. If there were economies of scale for landlords in NZ, there would be more major companies getting involved in the act, and they’re noticeably absent (in contrast to other countries). Of course, that’s largely due to the favourable tax treatment. I wouldn’t have a problem with a more concentrated market; it might be more consistent, more efficient etc.
My crystal ball is pretty cloudy, although I think the tax treatment of property is about to change, which may be the catalyst for consolidation. How consolidation would play out in terms of price for consumers/tenants is any ones guess, but I wouldn’t expect savings to be passed through quickly.
I agree that a number of scenarios I presented are fairly unlikely, but if we don’t talk about all of the possibilities, we all risk being labelled myopic by those who don’t like the conclusions we reach.
A lot of apartment developers are selling things above their actual value and making huge profit. The buyers are mostly speculative trying to find another buyer who buy from them for a profit.
That will works for a raising market, but when the market bust, many people will lose their shirts.
If the government really wants a lot of quality apartments, they will need to increase the supply of apartment land and less barrier to market, so there are more developers in the market to compete on both price and quality.
What’s your evidence for ‘above their actual value’? Actual value is what someone is willing to pay for it, isn’t it? Making a profit is not a crime.
The council (not the government) restricts land use, protecting residential neighbourhood character, to prevent the construction of apartments.
True in general. However right now in Auckland, the council wanted to make its PAUP operative two years ago but was prevented from doing so by central government.
One of the differences is that apartment supply, in the cbd, is increasing at a faster rate than suburban housing which will work to reduce any bubble, unlike suburban property.
What happens when the cbd land supply for apartments is saturated or used up ?
Will it be far enough away in time that some of the closer in suburbs will have relaxed the rule relating to density in the unitary plan, or will we end up with supply side issues that lead to further price increases?
I’m not sure that there will be enough land to meet the demands of high density housing, particularly in areas that have good quality PT and active mode access, which at the moment is fairly scarce.
There is so many land opportunities for apartment complexes in central Auckland and along roads like Gt North Rd that at current rates of building I don’t think there will be a shortage of land anytime soon. Then there are the multiple council owned parcels of land that are currently being used for carparking buildings, which have the potential for major redevelopment.
Simply walking along Beach Rd or the Strand shows how much land in the central city is wasted on low value, derelict buildings utilised for car mechanics, or at grade carparking.
Which car mechanics are these? Are those the mechanics and rental car companies on Beach Road that have been there forever? They’re providing a service. Just because you may not see an immediate need for it doesn’t mean there isn’t one. There’s more to a city than office space and apartments.
Butt Wizard, i think you’re missing the point. It is not that mechanics or car rental places are in any way worthless – but that car mechanics tend to want cheap rental space in order to make their business model work. Low value, semi-derelict buildings are exactly that – buildings that house useful things, although the built envelope itself is not particularly clever, or pretty. That doesn’t matter to a mechanic. BBC’s point was, I think, that there is a lot of under-utilised land on the edge of town.
I’ve read some rubbish in my day and this is more of it. I’m struggling to see any logic or analysis in their article. It is poorly thought out, poorly constructed and if they were were in 3rd grade they would get a C minus from me.
I’ve got no idea what point(s) they are trying to make.