Another month passes, and another month of Auckland values rising above the rest of the country. The latest CoreLogic monthly house price index shows that values in Auckland have increased by 14.6% over the past year. That has dragged the nationwide increase up to 8.3%.
As expected, the rate of Auckland’s increase has slowed slightly from a few months ago. The increase over the past three months has been 4.6%, down from the 5.1% in the three months to January. My expectation is that rate of increase in Auckland will slow back to an annual rate of 13% to 15%.
The other main centres continue to rise more gradually. Hamilton is not yet showing any sign of following Auckland upwards. Values there have increased by only 3.3% over the past year. This is despite relatively strong sales activity in Hamilton combined with a shortage of listings. You would normally expect this to be pushing up values, especially if the anecdotes of Aucklanders now looking to Hamilton as a more affordable option were true.
Tauranga is showing more signs of increasing, up 3.9% over the past three months compared to an annual increase of only 5.8%. However, like many areas of the country, values dipped during 2014 and a recovery in recent months is more likely getting values back to where they would have been had that dip not occurred, rather than a genuine acceleration. Time will tell.
Wellington area values have stayed barely above flat, increasing 1.1% over the past year. Like Tauranga, values dipped in early 2014, then recovered in late 2014, and for the last few months have returned to near flat.
Christchurch values continue to flatten, and while values increased 4.7% over the past year, they increased only 0.3% over the past three months. Dunedin is even more subdued with an annual increase of a mere 0.6% now giving way to a 0.5% decrease over the past three months.
The below bubble map shows the change in residential property values over the last 12 months. Note that the size of the bubble reflects the number of properties in the relevant area.
Speaking of bubbles: some commentators are claiming that Auckland values are in a bubble. I remain unconvinced. I see strong demand unmet by a shortage of supply. Demand is fuelled by low interest rates, growing employment, high business and consumer confidence, record levels of migration, and an economy looking stronger than Australia. A supply shortage isn’t likely to be fixed any time soon as building consent activity continues to slow.
That being said, there are some signs of property speculation in the Auckland market from investors and Chinese buyers. Let’s look at those two groups for a moment.
At the low end of the value range (the bottom 30% of Auckland properties by value) turnover has increased to near all-time highs. The most active group of buyers there are investors who are now picking up 42% of all the sales in this low value bracket. They do so largely at the expense of first home buyers who back in 2006 were buying around 38% of low-end properties but now are just above 26%. The LVR speed limits have definitely had an effect in this part of the Auckland market. Incidentally, there has been little change in first home buyer turnover at the low end of the market in other parts of the country.
The other demand driver in Auckland are the much discussed foreign buyers. There is no decent measure of foreign buyers available anywhere, so getting hard facts on this is difficult. However the anecdotes support Chinese buyers in particular paying above the odds in Auckland for multiple properties. Auckland property is seen as a safe place to invest their money, but also a great place to live and educate their children. And still much cheaper than Melbourne and Sydney I might add!
What would take these investors out of the market? You have to look at what their current motivations are. It’s generally not rental yield as rents have not increased in line with house prices. That’s hardly surprising given that rent is more closely tied to average incomes, and they haven’t increased in Auckland much. So investors are banking not so much on rental yield but on the increase in the asset. Let’s call them capital gains. But they remain a paper gain until sold. If investors see this future capital growth at risk then they will be less likely to add to their portfolios.
As for a decline in demand from Chinese buyers? That would take a fairly major shock to the Chinese economy. While this is possible, you also have to question whether that would lead to a major flight of Chinese property buyers out of the market, or for them to dump their current properties at any price just to release capital. Perhaps more likely is a further influx of Chinese looking to New Zealand as their new home.
Another line of reasoning I have heard lately is that the rest of the country now heading into a boom to catch up to Auckland? I don’t think so.
While over the past 30 years most of the main centres have tended to all move more or less in unison, who is to say that that will continue. My belief is that Auckland values are in part increasing to reflect its major importance as a growing financial and services hub for New Zealand, with strong demand and growth that the rest of the country simply doesn’t have. A gap is forming that will now persist.