Seaside properties take a dip

Coastal property was once considered to be an investment as 'safe as houses'. Photo / Doug Sherring

Three or four years ago, when the country was huffing and puffing about the surging cost of property, there was a particular area of the market that even the reasonably savvy thought was safe as houses.

You know how it went: coastal property, it's in our genes - and we're not making any more of it. Get in now because it will never be cheaper.

It's the sort of line electronic retailers use to press us to part with a spare grand when the dollar is sliding and price rises are reckoned to be closer than Christmas. Somehow we always fall for it.

But for a house and a lump of land, for the biggest ticket item most of us clip in a lifetime, how did we fall for that one?

As the volume of sales surged and residential prices began to gallop ahead of logic, we responded as if it were the sharemarket of the mid-80s. In we climbed, encouraged by a sea of credit - and then welcomed the latest council rating valuations that endorsed our economic prowess.

While home-owners with a foot on the property ladder toasted their good fortune, others watched in despair as values charged on, leaving mums and dads to fret over how the kids were ever going to buy their own home.

It's one thing buying a house to live in, raise kids, grow vegetables and feel secure; if the job is secure and the mortgage manageable, a paper dip in value is mild pain when selling is years away.

A holiday home near the beach, though - well, that's a little different. This is disposable income territory. If you're not Graeme Hart and you're not mortgage-free, the holiday home or the section can be a noose around the neck. The economists were as one when they warned that an over-heated coastal sector within a bubbling residential market would bring a nasty end for some people without enough equity.

Professor Bob Hargreaves, of Massey University's property unit says: "Lots of Kiwis have baches, and when you have downturns the first thing to go may be Mum's BMW. But the family bach may not be long behind - and I think we have seen that."

Some have stumbled, others are hanging on grimly. Economist and coastal property expert Rodney Dickens notes: "People who bought at the peak can justify their decisions all they like, but they are not going to get a return on their money for years."

All the data suggests that the North Island's classic sand-and-sea spots have slipped more than urban residential property, and lurking in the background is a near collapse of section prices which will inevitably flow through to general residential.

The slide over the past two or three years - detailed in our table listing QV median sales data over the past five years, and zeroing in on how things have gone since the peak - tells only part of the story.

Unlike some areas of the country - Auckland, Wellington and Canterbury - where median prices driven by a lack of supply have started to nudge ahead, coastal retreats are going the other way. In virtually all of them supply outweighs demand - a firm pointer to a continuing decline.

As more homes are listed in the areas showing growth, many economists believe prices will again flatten. If they're wrong and we see steady price increases over the next few years, that will also be good news for coastal property because values there will be pulled along for the ride.

But a weak economy with a high household income-to-price ratio, where job risk is still high, interest rate rises are on the horizon, banks are more demanding, and the chance of tax changes impacting on property prices is in the air ... it doesn't seem to add up to a fresh housing boom, despite the general shortage of homes and growing migration.

Though general residential prices especially in the big cities may stay up, the holiday home market is likely to fester, except in very small areas where properties seldom come on the market. New migrants don't buy baches at Matarangi, and it seems the economy will be slow to crawl out of the past recession.

"It is certainly true that coastal values got far ahead of themselves during the boom," says Dean Leftus, a property analyst with Auckland's Massive Action, "and it is incontestable that coastal property has suffered a greater decline than general residential since the market peaks, although sale levels are so low it can be difficult getting a true fix.

"When you can find beachside sections in the Far North - on beautiful beaches, but a million miles from a decent population base - with capital valuations of $1.3 million to $1.6 million, then you know things are out of kilter," he says. "You can get into Paritai Drive for that sort of money."

Dickens, managing director of Strategic Risk Analysis and a former head of research at ASB Bank, says there haven't been as many forced sales in coastal areas as he expected "given that we have survived one of the harshest economic crises ever".

"But these markets are still illiquid," he says.

"Large numbers of properties are just sitting there and not many people are willing to meet the market.

"In time, many of those who are sitting and waiting will come to the conclusion: 'We've been sitting here for five years and we can't sit any longer ... We have to sell'. "

At the moment, says Dickens, the market is in a "grind-out phase ... prices are so far from equilibrium because [holiday home owners] are not prepared to bear the reduction to stimulate demand".

That stance is behind the low level of sales in all the areas dominated by holiday homes and, combined with the economic outlook, suggests the slip will continue for some time before flattening out. The sales slump is graphically illustrated in the tables. The year to September 30, 2008, captured the initial blast of the downturn but the slide since then has been eye-opening.

Like any market, real estate goes through peaks and troughs, so how serious is it - and is this seaside dip different?

The prospect seems outrageous, but is it possible this bruising experience may make New Zealanders question their attachment to the bach? Take away the promise of capital gain - and factor in the amount of use, the "sameness" of always holidaying in the one place and the limited potential for rental yield - and could there in future be other ways to spend the summer, further reducing demand and prices?

While the bach has always been an emotional attachment it was only ever the cast-iron certainty of capital gain that made it stack up in an economic sense. The market now gives a jolt to that expectation and, if there is no lift in real terms over the next few years, is it not far-fetched to imagine the bach slipping down the order of must-haves.

Peter McDonald, national president of the Real Estate Institute, is having none of that.

"It is a Kiwi dream to own a holiday home by the beach, and nothing is going to change that," he says. "While we may be going through a trough at the moment, coastal property will always carry a premium and will always be in demand.

"Our coastal towns have a specialness to them that goes with being on the coast. You get to places like Whangamata and you feel more relaxed. The stress goes. That sense is in our genes."

Maybe so, but chat to people like Bayleys salesman Mike Harper in Whitianga and you wonder whether stress levels have been relieved on his broader patch - Coromandel areas like Matarangi, Pauanui and hometown Whitianga. It's been a "bloody difficult" last couple of years in his eyes.

Matarangi has been a special problem, with a cut in section size in the last stage of development bringing a split between "old" and "new", putting extra pressure on the overall appeal of the settlement and adding to the impact of the recession, says Harper.

In Whitianga, two-bedroom canal apartments have sold at mortgagee auction for half the original $800,000 selling price, and section prices have tumbled - all of that feeding through to other valuations in a town where sellers are everywhere and buyers are nowhere. Down the peninsula at Pauanui, a median price dip of 24 per cent over two years suggests the affluent come unstuck as readily as the skint.

But back to that Kiwi love affair with the beach and bach - will the gene always be passed on, sustaining the demand? Middle class baby-boomers probably have the highest holding of holiday homes, but Generation X and Generation Y products are different animals.

Professor Hargreaves makes the point that when the baby-boomers start nodding off in numbers in a decade or two, there may be less resolve to keep the bach within a family that could be spread all over the world.

Then there's the issue of the "solid future demand". In the latest boom, says Dickens, a lot of people took advantage of low deposits and easy finance to step into the holiday market much earlier than they had anticipated. They were tomorrow's prospective holiday home buyers who got in early, further reducing the number of "natural buyers" in the years ahead.

With the house price-to-household income ratio still very high, the first-home mortgage takes more time to conquer these days - and may further dilute future beach house demand.

So it's a cloudy future for coastal holiday home real estate, the sector that seemed almost invincible just three years ago - and it's complicated by the shadow cast by thousands of sections for sale at huge discounts.

In the end, DNA may well come through as it always has, so perhaps no problem if you've bought, are well-capitalised and want to stay. But if you got in late and need to get out, the news doesn't look great.

TIDE IS OUT ON COASTAL PROPERTY VALUES

For an idea how things have gone since the market highs, look at the QV table column (see related PDF "Coastal property values", right) which tracks the median selling price through the peak of the market (the year to September 30, 2007) and compare it to the 12 months to September 30 this year. Gloss over satellite suburbs (like Orewa, Stanmore Bay, Red Beach, Papamoa and Mt Maunganui) which are listed mainly to give comparison. Many in those places live and work in the area, and values are connected to what's happening in Auckland or Tauranga. Look at Mangawhai Heads (the 2006 Census suggests the population is half permanent, half "visitor"), Pauanui ("holiday homers" outnumbers permanents by around 2 times), Whangamata (42 per cent "holiday-homers") or Whitianga (30 per cent).

Now the picture becomes clearer, though the tables are hardly definitive because they use median price data which is subject to some distortion when sale volumes are small.

The survey settled on seaside areas of more than 500 houses, but with sales of just two or three a month in smaller areas (half the levels of the market highs through 2006 and 2007) it is impossible to paint more than a trend unless a wider period is taken.

For that reason, the Weekend Herald opted for data settling on 12-monthly medians - the median price over a full year of sales - but even then the results may give wide distortions and figures, for smaller centres in particular, should be seen as just a general guide. In the two-plus years since the market peaked, the median price for Pauanui is down by 24 per cent. Mangawhai Heads is down by 11 per cent, and Whangamata and Whitianga 9 per cent. The long median period doesn't give an accurate picture of what's happening now. In Whangamata, for example, a leading local agent says prices are down up to 15 per cent.

Shifting the focus to three-monthly data which the Weekend Herald had access to suggests there's no slowing down in the decline. Over the five years since the year to September 30, 2004, Pauanui has shown no growth in median price, and a decline in real terms - though ahead of Matarangi with a 14 per cent value drop. Mangawhai Heads and Ohope also look weak, and Whangamata is down in real terms. But most of the other areas surveyed have recorded good price growth, adding weight to the argument that coastal property won't let buyers down if they enjoy the sand and can ride through the tough times.