Property Report: Origins of a heated property market

By Tony Verdon

NZ Herald·

8 Jun, 2014 07:00 PM7 mins to read

Auckland Boys Grammar: High demand for houses in the double Grammar zone have had a ripple effect on suburbs outside the zone. Photo / Sarah Ivey

Inflated prices are the new norm in Auckland. But how did the housing market get to the point where it’s attracting bubble warnings.

It was a modest, three-bedroom, former State house in Ellerslie bought in 1996 for $210,000, just below the average for in the suburb's properties. Eighteen years and a "tasteful" renovation later, the home sold at auction for $1,008,500. Interest in the property was so strong Barfoot and Thompson brought the auction date forward.
Two decades ago, 88 Main Highway $1 million-plus pricetag would have been inconceivable. It would have raised eyebrows just five years ago. But no one would be surprised today, even though the house is outside the favoured double Grammar zone.

Auckland's property market is booming, with house values increasing across the city by almost 14 per cent over the last 12 months. One agency alone, Barfoot and Thompson, sold 116 homes worth more than $1m during April - 12 of them for more than $2 million.

In Ellerslie, QV's E-Valuer estimate of average value at the end of April was $709,500, more than 22 per cent higher than two years ago. Ellerslie values are now 41.5 per cent higher than they were at the last peak in house prices, in 2007.

Auckland has largely defied Reserve Bank efforts to rein in price increases. Paying over the odds for a home that would struggle elsewhere in New Zealand is simply the price buyers must pay if they want to live in the country's largest city. But how did Auckland get to the point where experts decry it as having one of the world's most unaffordable housing markets?

While planning restrictions aimed at limiting Auckland's urban sprawl are blamed for recent run-away growth in house prices, a review of the past two decades reveals prices in the city have been more volatile than elsewhere in the country. Economists, bankers and those involved in the housing industry say there will always be peaks and troughs, depending on economic circumstances, the world economy and myriad other factors.

There are many "sub-markets" across the city, they argue, where localised factors, such as proximity to reliable and quick public transport, influence prices. But generally, supply and demand are the two major factors raised when trying to explain Auckland's situation.

Aucklanders know only too well there has been a rapid rise in house price inflation since 2012. The Reserve Bank says that while there has been a city-wide shortage of houses, demand for housing increased because of strong economic growth, low interest rates, and easy availability of mortgage finance.

Auckland also creates more jobs than any other area in New Zealand, and it is the destination of choice for the majority of new immigrants. Internal migration also plays a significant part in demand for houses, and with net immigration continuing at high levels, partly because fewer New Zealanders are moving to Australia, pressure is unlikely to ease anytime soon.

There is much debate about the origin of Auckland's new arrivals, with China usually singled out, but economist and philanthropist Gareth Morgan challenges these assumptions. He says the largest source of migrants last year - and every year for the past two decades - was the UK. Compared to 8600 net arrivals from China last year, 14,000 people arrived from the UK. "While focusing on migration patterns from Asia seems to be a hobby for many, it won't get you very far if you want to understand fundamental pressures in the housing market," he says.

Others lament the lack of official data about the impact new migrants have on the housing market. BNZ chief economist Tony Alexander tried to gauge the effect through a survey of estate agents but abandoned the project, partly because the response from agents in regional areas was not high enough to provide reliable figures. Increasing political pressure may lead to more detailed statistics.

What is undeniable is that Auckland's central suburbs such as Mt Eden, Epsom and Remuera are favoured by many external migrants because they lie in the catchment zone for two of the city's most prestigious state schools: Auckland Grammar and Epsom Girls Grammar. While these suburbs - known as double Grammar zone - have become too expensive for many, the ripple effect has boosted prices in neighbouring areas such as Meadowbank and Ellerslie. The QV E-Valuer average price in Meadowbank at the end of March was $873,150. This was 12.3 per cent higher than March 2013, and 26.9 per cent higher than March 2012. Using this measure, prices in Meadowbank are about 43.3 per cent higher than the last peak in 2007.

The ripple effect can also be seen in price increases in suburbs further out: Glen Innes and Mt Wellington, traditionally working class suburbs with much State housing, enjoyed price increases in the last two years by 35 per cent and 31 per cent respectively.

Property investors have also come under fire for rising prices, although many of them say they have avoided the hot central suburbs, because they can get better returns elsewhere. Shamubeel Eaqub, principal economist with the independent research organisation New Zealand Institute of Economic Research, says an investor-driven surge is not without risk.

House sales volumes lead economic growth by around six months, but they have slumped by almost 20 per cent across the country in the last six months. "In an investor-driven market, sales and prices can turn rapidly," he says. "Slumping house sales are a significant risk to our optimistic outlook for the economy."

Other economists lay most of the blame for the Auckland situation with the previous Auckland City Council and other local authorities who, by restricting urban sprawl, created the pent-up demand for affordable new housing. Since the previous peak in house prices in 2007, the country has struggled with the impact of the global financial crisis, which quickly removed pressure on the expansion of the city limits. However, the Reserve Bank is satisfied there is evidence the construction of new homes has gathered pace, although the gap between supply and demand remains significant.

A Productivity Commission report on home affordability revealed that section prices more than doubled in Auckland between 2000 and 2012. Sections within 25km of inner-city Auckland, tripled in price during the same period. Land costs now comprise 60 per cent of the cost of building a dwelling in Auckland, compared with 40 per cent in the rest of the country.

These figures reflect the enduring appeal of what valuers describe as the "legacy suburbs", such as Ponsonby, Epsom and Remuera. Using data from last year's Census, the Reserve Bank estimates the housing shortage in Auckland to be between 5000 and 10,000 dwellings. Auckland Council estimates that 10,000 new dwellings will be required each year to meet population increases.

During the last year "greenfield" land in the pipeline for housing development, which has been zoned and has utilities connected, has increased to provide around 25,000 dwellings. This is 10,000 more than a year ago.

The Government and the Auckland Council say their efforts to boost the construction of more affordable housing will result in homes becoming available by the end of the year.

They say approval processes are being streamlined and the time required to get construction under way has been reduced.

The Government still believes there are bureaucratic hold-ups in the processes, but it has been unable to persuade its coalition partners to support changes to the Resource Management Act that would achieve this.

While some economists question whether Auckland's housing shortage is as extreme as many suggest, few predict a dramatic fall in prices. Most say the increases experienced in Auckland will slow, but that demand is unlikely to disappear unless there is an unexpected domestic or international economic shock.