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Auckland bounce back confirmed as other main centres grow

Jonno Ingerson, Head of Research, CoreLogic NZ Ltd.

Another month has passed and the rebound of Auckland values can now be confirmed. The latest monthly QV House Price Index shows that the dip in values which started in December only lasted two months. And the drop in values was a measly 0.8%. In the last two months values have begun to rise again and have not only recovered that small dip but gone ahead of the December high by a further 1%. Auckland values are now at a new high of $942,760.

So what happened? Why did Auckland dip then recover? There are two main reasons. One is the rules and regulations that came in late last year aimed at slowing Auckland’s rapid rise in value. These included the capital gains tax properties re-sold within two years by investors combined with tougher lending conditions for investors, plus the requirement of foreign buyers to have a local bank account and tax number. The second is definitely related, and that is the temporary disappearance from the market of Chinese buyers. This disappearance can be linked to the foreign buyer rules, but also to the Chinese stock market slump in August and the subsequent restriction of money flows out of China. Local Chinese could no longer access funds from China so had to sit it out for a while.

It appears that both of these brakes on the market have been released.

The restrictions on investor activity led to them spending a month or two standing back to see how the dust settled. Upon realising that the sky hadn’t fallen and that the Auckland market is likely to keep increasing, normal service has resumed. Our buyer classification analysis shows that after a small dip in activity late last year, investors are now just as active as they were before.

Foreign buyers needed a few months to arrange their bank account and tax numbers  and in the case of some Chinese buyers work out how to get their money out of China. Anecdotes and contacts in the Chinese community tell us that foreign buyers are back.

With investors and foreign buyers back, combined with record high migration, low interest rates, a housing and construction labour shortage, and now a seasonal listing shortage means that Auckland values are continuing their almost inevitable rise.

What is more interesting to watch is the rise in values across the rest of the country. We have seen the effect of Auckland money moving into the surrounding areas. Values are now increasing in Tauranga and Hamilton faster than in Auckland. Again our analysis clearly shows that Aucklanders moving to Tauranga are helping drive demand, while in Hamilton it is more the activity of Auckland investors.

The impact of Auckanders is also being felt to the north, but as those markets have less local demand than further south the values there are not rising as fast, more like 15% over the past year in Whangarei. The rest of the Waikato and Bay of Plenty regions are also increasing strongly in value as Auckland money flows in, rising at 5% to 7% over the past three months alone.

Further south and some of the North Island rural towns are not enjoying the same strength as their northern neighbours.  A weak rural sector and falling commodity prices plays a large part in that.

Meanwhile Wellington continues to rise. After a long period of stagnation following the 2009 recession values there are at last on the rise. Much to the shock and horror of many first home buyers who have spent years being picky and facing little competition. Stories doing the rounds of large numbers of Auckland investors flooding the market are not supported by our data which show that Auckland investors account for only 4% of Wellington sales. That is definitely up from the 2% to 3% of recent years but well below the levels of further north. Furthermore there has been no significant increase in Aucklanders moving to Wellington.

In the South Island values are on the rise in most areas also. Canterbury remains the exception and my suspicion is that the rapid increase in values following the 2010 and 2011 earthquakes overshot fair value and the market is now reflecting that. You can see the same impact in rents which have dropped over the past year as inflated post-earthquake rents fall back to meet true market demand.

Dunedin has been a quiet performer also. Like Wellington, values were relatively flat since the recession but almost exactly a year ago started to rise. But at less than 1% per month their rise almost went undetected. Now that a year has passed values are up 9% or just over $26k.

The star performer of the South Island is Queenstown Lakes where values have risen nearly 18% over the past year and at an average value of nearly $843k it is the second most expensive place in the country behind Auckland, and $243k higher than Wellington City in third place. The high prices and lack of supply has led to an overflow into the neighbouring Central Otago District where values are up 13.5% or $44k over the past year.

None of the rise in values in the South Island can be attributed to Auckland money and is instead more a reflection of an organic increase in those markets.

My expectation is that Auckland will keep increasing in value, but at a more moderate rate that we saw last year. I also expect the other main centres to increase in value along with provincial towns that aren’t affected by a downturn in their local industries.

The Reserve Bank needs to keep interest rates low in order to influence inflation and stimulate the rest of our economy. But low interest rates fuel the property fire, so I expect consideration of more macro-prudential tools to specifically target housing. While we have little indication what these might be, it is possible that the current Auckland investor restrictions could be rolled out nationwide. Placing limits on mortgage lending based on the lenders income is another potential idea, but one I believe could lock out more first home buyers.  Land tax now seems to be on the table too, but for that to be effective it would need to apply far beyond non-residents.

I think we’re in for an interesting year.

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