Study reveals causes of Auckland housing boom

By BRIAN FALLOW economics editor

Research into the longer-term factors driving house prices contains good and bad news for Auckland.

Dr Arthur Grimes, a senior research associate at economic and public policy research house Motu, yesterday presented some initial results of work Motu is doing into the determinants of owner-occupied house prices.

They found a very strong correlation with the strength of the local economy as measured by the National Bank's regional economic activity index, which bundles together an array of indicators including business and consumer confidence, jobs growth, retail sales and car registrations.

A 1 per cent increase in regional economic activity, other things being equal, will deliver a 1.2 per cent increase in house prices over and above consumer price inflation.

In greater Auckland's case, that indicator has been slowing from the rip-roaring rates recorded in the middle of last year. But it is still up nearly 12 per cent on its level three years ago.

Another driver is the supply of housing. Dr Grimes said a 1 per cent increasing in the housing stock, all else equal, would result in a 0.7 per cent fall in real prices.

Construction has been running hot in Auckland. Building permits issued in August were up 21 per cent on August last year.

The other major driver is the "user cost of capital", which is interest rates minus expected capital gains.

As a proxy for capital gain expectations, the researchers use what has happened to regional house prices over the previous three years.

In greater Auckland, Quotable Value's house price index has risen 27.6 per cent in three years.

"If regional prices build up a head of steam you would need major rises in interest rates to offset the effect [on the user cost of capital]," Dr Grimes said.

Auckland prices have surged in the past two years after a four-year standstill stretch.

Such surges can result in overshooting, where prices rise to levels higher than can be justified by long-run drivers, especially economic activity, and then dip before settling.

Sales activity or turnover is not necessarily a good pointer to price rises, Motu found.

"High sales activity two quarters earlier does lead to higher price growth, but only if prices are below their long-run level," Dr Grimes said.

High turnover is a spur to action if the market is underpriced - people see the need to buy or trade up while the going is good.

"Turnover doesn't drive the market independently to go too high," he said.

The widespread belief that property values only go one way - up - is not borne out nationwide. Although real house prices have more than doubled in the Auckland region since 1981 (up 11 per cent over and above CPI inflation) they have fallen by 27 per cent in Southland.

In Auckland City they rose 152 per cent over the same period in real terms but fell 50 per cent in the mill town of Kawerau. Over the past 10 years prices have had a strong tendency to rise faster where they were high to begin with.

On average for a $10,000 difference in house prices between one city and another, prices in the more expensive city will grow 1.4 per cent faster than in the less expensive city.

That result was not just an Auckland phenomenon, Dr Grimes said. Were Auckland excluded, the effect would still be 1.2 or 1.3 per cent.

The cumulative effect of that divergence raises barriers to mobility, people's willingness to move from one part of the country to another to work.

For example, in 1981 an average house in Manawatu/Wanganui was worth about two-thirds of one in Auckland. Last year it was little more than a third.