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Ladies And Gentlemen, We Have Lift-Off

Average property values have left the launch pad, but credit conditions and other market pressures mean the stratosphere is a long way off, writes Sally Lindsay.

By: Sally Lindsay

29 December 2023

Auckland value growth for November was consistent across sub-markets – with North Shore up by 1.8 per cent.

CoreLogic’s House Price Index shows another rise in November of 0.7 per cent.

The net result is that average property values were up by 1.1 per cent over the three months to the end of November, and the annual change sits at -4.5 per cent, the softest annual decline since November 2022, when it was -2.9 per cent.

From the peak to September trough, values fell 13.2 per cent. After the increases in October and November, values remain 12.3 per cent down from the high, at $915,448.

Auckland, Hamilton, Tauranga, Wellington and Christchurch had monthly rises in the range of 0.7-0.9 per cent, while Dunedin rose by a buoyant 1.9 per cent.

However, the market hasn’t exactly soared away, says Kelvin Davidson, CoreLogic’s chief property economist. While sales volumes have been growing steadily in percentage terms, it’s from a low base that hasn’t translated into a surge in the number of deals.

Meanwhile, credit conditions remain challenging. “Even if mortgage rates don’t rise much further, or even dip a bit for the longer-term fixed rates, they’re still high, and serviceability testing remains a significant hurdle,” he says. “Loan-to-value ratio rules are quite a restraint on low-deposit lending as well, although first home buyers are certainly taking advantage of that speed limit where they can.”

In Auckland the growth in property values over November was fairly consistent across the sub-markets, with North Shore up by a robust 1.8 per cent, but Rodney, Auckland City and Waitakere in a more measured range of 0.7-0.8 per cent. Franklin was a little softer, while Manukau and Papakura actually saw values drop in November.

“The results serve as a further reminder this upturn may not be all one-way traffic,” Davidson says. The patchiness in property values by sub-region, even though wider market averages have started to turn around, could well remain a feature in coming months.

Further south, Wellington is another key part of the country where property values have also started to turn around relatively promptly.

Lower Hutt and Porirua had seen average values rise by 1.5 per cent in November, with the latter’s figure now up by almost 5 per cent in the past three months. While that momentum may not be maintained, for now Porirua is showing steady gains.

Diversity in market conditions exists outside the main centres, with Queenstown at 3.2 per cent and Gisborne at 1.9 per cent posting strong gains in November. Whangarei at -0.9 per cent and Rotorua at -0.6 per cent lagged behind, while Nelson and Invercargill were flat.

Davidson says this just illustrates the variability evident from region to region which might stay in play in coming months.

Auckland Rebounds

Wealthy Auckland buyers who can afford $2 million-plus houses have returned to the market in force.

The city’s biggest real estate agency, Barfoot & Thompson, sold 91 properties in November priced at more than $2 million – the highest in a month for 20 months. Of this number, 24 sold for more than $3 million, also the highest number for 20 months.

Barfoot & Thompson’s managing director, Peter Thompson, says the housing market has accelerated with sales numbers increasing significantly and prices recovering most of the lost ground recorded in the 12 months to the end of November.

The agency sold 956 properties in November, up 13 per cent on the previous month and a third higher than in the same month last year. It’s the highest number of properties sold in a month for 21 months.

Property prices have started to bed in, with the median price hitting $1,018 million – the highest in eight months – while the average price at $1,185 million was the highest in 19 months.

Significantly, the average sales price for the month was up 2.8 per cent on that for November last year. The median monthly price in November is within 4.4 per cent of its 2022 equivalent, the closest the 2023 monthly median price has come to matching that for 12 months earlier.

“This demonstrates prices being paid are no temporary, short-term recovery, but show a sound, rising market,” Thompson says.

Price Predictions

ANZ is not expecting meaningful house price rises this year.

Nationally, house prices are still a long way below their peak and the bank is forecasting it will take years to attain those levels again.

Chief economist Sharon Zollner says it’s not just house prices that are on the weaker side – indicators for sales and new listings show there is further softness to come.

New listings are (just) above 2022 levels. Zollner says all else equal, this extra supply will make it more difficult for house prices to rise meaningfully over the next few months. This lift in listings is on top of an already large stock of inventories, which needs to decline before meaningful rises in house prices are likely, she says.

“The risk is that house prices rise less than we expect this year, given recent modest further lifts in mortgage rates and the somewhat faster-than-expected labour market loosening. Dropping job security is likely to make would-be first home buyers more nervous about taking the plunge, but there’s also a feed-back loop here.

“Sharply rising unemployment can negatively influence credit availability too, making the outlook all the more uncertain for credit providers.”

Zollner says the faster than anticipated restoration of mortgage interest deductibility and other landlord-friendly policy changes agreed to by the new coalition government are risks in the other direction, although difficult to quantify.

Rents And Supply

Auckland’s rents are among the priciest in the world.

The city has the dubious distinction of being the third most expensive city globally in which to rent. It’s only behind Sydney and Tokyo.

The latest report by global real estate agency Knight Frank shows Auckland rents spiralled up by 13.1 per cent over the 12 months to the end of the September. That’s a 5.9 per cent increase from the second to third quarter.

Property Investors’ Federation vice-president Peter Lewis says he would be surprised if rents had risen that much. He says it may be possible for newly-signed rental agreements, but would be astonished if it related to existing rentals.

“While many landlords have put up rents to existing tenants because costs have gone up in terms of insurance, rates and interest payments, I don’t think they would have risen that much.”

For example, Lewis says he tries to keep his rents at market level. On a $500-a-week rental he would be putting the rent up $40-$45 a week to keep up with rising costs. “That’s about an 8-9 per cent weekly increase over 12 months.

“Providing rental accommodation is the only industry in New Zealand restricted to how often it can change or increase prices. Petrol stations, banks, supermarkets can put up prices as and when they wish, but for some obscure reason landlords are the only people who are restricted to one rent increase every 12 months.”

Knight Frank’s Prime Global Rental Index show rents are rising at a rate three-and-a-half times their long-term pre-pandemic trend.

Strong global growth has pushed prime rents 17.9 per cent above their pre-pandemic high in the third quarter of 2019 and 25.5 per cent higher than the pandemic low of the first quarter of 2021.Auckland’s rent rises can be put down to record numbers of new migrants flooding into the country and a lack of rental housing. Lewis says he has seen a big increase in the number of migrants looking for rentals.

Earlier last year he rented one of his properties to a South African family on a two-year work visa and he’s expecting a house he has coming up for rent to attract a slew of applications from migrants.

From Pain To Gain

Median resale profits on houses are just short of $285,000, down from the peak of $440,000 in late 2021, but still strong.

CoreLogic’s latest Pain and Gain Report shows in the third quarter of last year 92.6 per cent of houses were sold for more than their original prices, but the figure is down on 92.9 per cent in the second quarter of last year and well down on the 99.3 per cent in the fourth quarter of 2021.

Although it still represents more than nine in every 10 properties selling for more than the owner originally paid, the figure is also barely changed from last year’s second quarter result of 92.9 per cent.

Put another way, says CoreLogic’s Davidson, most property resellers in the third quarter of 2023 still got a price higher than what they originally paid, reflecting the fact that most people have held their property for several years.

“None of this should be too surprising,” he says. “Driven by higher mortgage rates, the wider downturn in property values began in late 2021 and ran for about 18 months, meaning that a pass-through to less gain (or more “pain”) for property resellers was always inevitable – especially if they’d only had a relatively short hold period of one to two years, meaning they bought at or near the peak of the market, and are now selling in different conditions.”

For context, national average values are about 13 per cent below the peak and are back down to mid-2021 levels. That’s roughly two years ago, and breaking down the loss-making resales of the third quarter, about 53 per cent of those had a hold period of less than two years.

On the other hand, the wider property market has now generally found a floor, although some areas are still falling.

Davidson says given there can be lags to some extent between market values and the trends for the pain/gain indicators, it wouldn’t be a complete surprise if the resale performance of property over the next quarter or two weakened a little further – especially if the labour market softens more materially.

However, he says it also seems fair to suggest the “pain” proportion is closer now to its peak than the trough, and a slow recovery in property values over the next few years will eventually see the loss-making proportion slowly decline again over the medium term – especially in most cases where the hold period has been lengthy.

What’s Driving House Prices?

HOUSE PRICES: UP CoreLogic’s House Price Index shows average property values were up 1.1 per cent over the three months to the end of November, and the annual change sits at -4.5 per cent, the softest annual decline since November 2022, when it was -2.9 per cent.

OCR: STEADY The Reserve Bank’s official cash rate has been held at 5.5 per cent since July last year after the RBNZ indicated it was at the end of its tightening cycle. However, in its November Monetary Policy Statement it said it could lift the OCR again if inflation fails to drop.

INTEREST RATES: DOWN ANZ is predicting the one-year mortgage interest rate should be down to about 6.3-6.6 per cent mid-this year, before dropping to 6 per cent in December.

BUILDING CONSENTS: DOWN The number of new homes consented in October was down 21 per cent compared with October last year. Across the board, 39,900 new dwellings of all types were consented for the year to October and in the month, there were consents issued for 3,060 new homes, comprising 1,380 townhouses, flats and units; 1,255 stand-alone houses; 201 apartments and 184 retirement village units.

MORTGAGE APPROVALS: UP October’s new mortgage commitments were $5.8 billion, up 11.2 per cent from $5.2 billion in September and up 3.5 per cent on an annual basis. New mortgages to first home buyers rose 12.3 per cent to $1,369 billion in October, up from $1,253 billion in September, while lending to investors rose slightly, up to 17.7 per cent, or $1,021 billion, from $894 million in September. The share of mortgages to first home buyers has exceeded the share to investors each month since April 2022, but the share of lending to investors has been rising and increased from 15.4 per cent in January. The average value of new mortgages across all borrower types rose to $367,100, up from $347,000 in September.

RENTS: UP Rents across the entire market, including existing tenancies, rose 4.1 per cent nationwide in the year to October, according to Stats NZ’s latest price index. That figure was up 1.5 per cent annually. It contrasted with Trade Me’s latest rental figures, which show the national median rent was up 7.5 per cent over the year, just ahead of the 7.2 per cent rate of inflation. While the national median rent was $575 in September, a jump of $40 on the same time last year, it had remained in the $570-$580 bracket since January last year.

IMMIGRATION: UP Stats NZ data show migration surged to a new record of 128,919 in the 12 months to the end of October. About 245,648 arrived in New Zealand on a long-term basis while 116,730 departed long-term, giving a net gain of 128,919. This is the biggest net gain ever recorded in any 12 month period.

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