Where to for Auckland apartment prices? $49,000 bargains come with catch

Bargain-hunters could be in luck if a financier's forecasts are fulfilled on Auckland inner-city apartment values plummeting, although other experts believe prices will hold up in the city where some units are going for just $49,000.

John Bolton of Squirrel Mortgages said New Zealand's closed borders meant foreign university students and overseas workers with short-term visas, who formed a big part of the inner-city's population, were largely not in residence any longer.

Inner-city Auckland apartments are often small, resulting in lending restrictions. Photo / Doug Sherring

"Apartment vacancies could rise due to a general lack of foreigners - foreign students, tourists, the diminishing number of people on work visas, here from overseas working in the tourism and hospitality and retail sectors, as well as a drop in demand for Airbnb," Bolton said.

"That could push down values," he said, although apartment mortgagee sales were unlikely due to historically low mortgage interest rates and options for investors to go interest-only on repayments.

Units 1c and 6f in Glen Eden's Westward Ho Rd are being advertised by Ray White and Barfoot & Thompson for just $49,000 each, and they have carparks, although recladding work is also disclosed. Buyers must pay an extra $250,000 to $270,000 for repairs between November and next March, ads say.

Kiwibank mortgage calculator repayments on a 25-year loan for one of the units is calculated to be only $45 a week at 3.4 per cent interest, based on a $9800 deposit on the initial purchase price of $49,000.

OneRoof data partner Valocity said it was still too early to draw conclusions as to the value impact of Covid on the Auckland central apartment market - and it was important to be careful with certain data.

"For example, using a metric such as median sale price to analyse the apartment market at present can be incredibly misleading given the low sales volume transacting and the changing nature of the sales composition which is transacting," said Valocity director of valuation James Wilson.

Valocity's own data revealed Auckland City values had softened 1% since lockdown.

"In regard to sales activity, as per other submarkets we saw a significant reduction in sales volumes of apartment stock leading into the lockdown period and in the period immediately following lockdown.

"However, it is also important to note that sales activity for certain apartment types was already relatively flat coming into Covid-19 – unlike other market types which were experiencing a strong surge."

Signs were emerging of "downward pressure" on certain apartment types.

"For example, there has been a marked increase in smaller apartments for rent, which would typically be occupied by seasonal or longer-term students.

"Property managers are now having to work with their landlords to work through what their approach is, either lower the rental for the short term to attract a tenant.

"If these rental rates then stay low for some time, there becomes a very real risk to the value of these assets for an investor."

At the high end of the market, there was anecdotal evidence that apartments were continuing to "transact strongly".

CoreLogic has noted the continued rise in market share for first home buyers of Auckland apartments, "now accounting for 15 per cent of purchases of existing Auckland
apartments, up from 10 per cent two to three years ago. Some of that has come at
the expense of the 'new-to-market' category, which includes foreign buyers. Of course, that's not entirely surprising, given the ban that was introduced in October 2018".

CoreLogic data out in April also noted low levels of mortgagee sales nationally "but with unemployment starting to rise sharply, the chances are that these figures will, unfortunately, start to increase from now on. However, the hope has to be that the mortgage payment deferral scheme, for example, and the supportive attitudes that lenders are showing will help keep mortgagee sales as low as possible".

Auckland's apartment market could be threatened by border closures. Photo / Alex Burton

Bolton said all indicators pointed to Auckland apartment values falling but he was reluctant to put an exact number on it.

"Everyone expects there will be some softness in house prices, although that's hard to see right now.

"But one part of the market where we really do expect to see softening is Auckland apartments because they're harder to borrow against, which means they're usually not for first home buyers.

"A lot of smaller apartments have been built and there's not a lot of appeal of those to owner-occupiers.

"There's now weaker demand from buyers, but on the supply side, there's a lot of new units being finished."

Without the thousands of foreign workers and students being able to live in Auckland, Bolton says rentals will be "hit hard", potentially driving up vacancies and also giving those tenants who remain in the market an upper hand.

Without foreigners, where to for Auckland apartments? Photo / Doug Sherring

Foreigners could also sell their Auckland units, further flooding the market. Bolton said some developers targetted foreigners, particularly Singaporeans, and he anticipates a declining appetite from that market.

"Overseas owner quits! Buy today," City Sales says of the July 22 auction of a one-bedroom, level-nine 48sq m Spencer on Byron unit in Takapuna.

CBRE's NZ market flash research from Tamba Carleton on June 22 said: "Between November 2019 and January 2020, 207 apartments pre-sold off the plan in Auckland region, four fewer than the 211 recorded for the February to April 2020 quarter."

Today, Carleton said many factors were influencing Auckland apartment prices and values.

"In the first three months of 2020, we had 30,472 people arrive in New Zealand to live, of which 6898 were New Zealand/Australian citizens. I only have data for April, but of the 500 arrivals in April, 424 were New Zealand/Australian citizens and there is anecdotal evidence that the inflow has continued in May and June," she said.

ANZ today dropped the one-year fixed mortgage interest rate to 2.55 per cent, she also noted.

Although there was a rent freeze during lockdown, the bond data showed Auckland rents went from $568 a week in January to $578 a week in June.

"So mortgage payments have come down with interest rates and rents have gone up, giving a better yield for investors."

Diversity of the supply pipeline in the past five years was another factor.

"This is not like the GFC where 12,000 CBD apartments were completed during four years, which eventuated in oversupply when student occupier demand fell away. The supply pipeline has been spread right across Auckland, and there is a diverse mix of buyers including owner-occupiers, who are buying their first home or downsizing," she said.

"On balance I see apartment values being resilient, more so than during the GFC, and this is because the sector is more mature and diversified, as well as being generally cheaper than stand-alone dwellings."