The old joke goes something like this: if you put 10 economists in a room, you’ll get 11 opinions. So it’s rare that you get two economists agreeing with each other on the state of the property market. Yet at the recent TMM Better Business conference the unthinkable happened.

The two economists speaking, newly independent economist Tony Alexander and CoreLogic senior property economist Kelvin Davidson, were in broad agreement on the outlook for the property market. Both talked of positive signs in the latest data and suggested that the tide might be turning for Auckland’s market. But both also said this did not mean another boom was on the way.

Alexander’s presentation was a macroeconomic overview of New Zealand, which included the housing market, while Davidson’s took a close look at the fundamentals of the property market. For that reason, in this month’s commentary, we report on what Davidson had to say.

Values Ticking Along

It’s values, or prices, and their trajectory that people tend to look to first, and they appear to be ticking along in a reasonable fashion. October was a decent month for values around the country, with even Auckland “less bad” than it has been for a long time, Davidson says.

CoreLogic’s latest data shows monthly, quarterly and annual value growth in all the main centres, apart from Auckland. Even Auckland – which has an average value of $1,031,447 – saw monthly (0.4%) and quarterly (0.6%) growth, although not annual.

In the data, it is Dunedin that remains the star performer with quarterly growth of 6% and annual growth of 14.7%, which left its average value at $486,395. Tauranga and Wellington also saw strong annual growth, of 7% and 6.4% respectively which left their average values at $757,521 and $730,019.

Davidson points to Christchurch’s long-dormant market as one which could see good growth going forward. But it’s Auckland’s market that is most interesting, he says. It too has been flat for a long time, but the data suggests it might have reached a turning point.

Meanwhile, in provincial markets, there is slow growth, but it’s still growth, Davidson says. “Averaged out across the market there’s growth of about 8-10% and in some areas it’s much stronger. Hastings is up 20% year-on-year to an average value of $540,583, for example.”

There are a couple of markets – including Napier, Nelson and Palmerston North – which have become less affordable and they could be poised to slow now, he adds.

Signs Of Sales Uptick

When it comes to sales, Davidson thinks national volumes seem to have bottomed out. “They have been sliding since 2016, but they may have hit a floor and, over the last month or so, there seem to be signs of an uptick.”

This month’s REINZ data also suggests this. While sales volumes around the country were down by 4.0% year-on-year in October, they were up by 12.1% from September. In Auckland, where sales activity has long been subdued, sales were down by just 0.1% annually, but they were up by 8.5% on September.

Davidson says sales activity could level again, but there is more evidence of positive activity. This was particularly notable in Auckland as the Super City tends to be a market driver.

The latest data from Barfoot & Thompson provides support for this. The agency reported that it saw 824 sales in October, which was an increase of 6.9% on September’s 771 sales. It was also 3.1% higher than the average number of sales for the previous three months, but it was still 2.4% down on the number of sales in October last year.

On top of the more positive sales activity, listings are still generally low around the country and in Auckland they have fallen.

“While there are some signs of a post winter seasonal increase, there’s a feel of more buoyancy created by shortage. In Auckland, the market is tightening.” This all adds to the feel that the market might be picking up, he says. But it’s worth noting there are different patterns evident in different markets around the country.

‘This suggests the negative view around prices is not well founded. There’s still more people than new houses, so demand is outpacing supply and that equals price growth’ - Kelvin Davidson

Investor Comeback

It’s widely accepted that following the introduction of the Reserve Bank’s third round of LVRs, back in 2016, mortgaged investors fell away from the market. Now, there’s evidence they’re returning.

Davidson says their data shows that mortgage investors are coming back to the market, both in Auckland and across New Zealand. In his view, this is one of the big changes of the last three months.

“Why wouldn’t they return now?” he says. “There are low rates on deposits so people are looking to property investment again. There’s been a confidence boost due to the scrapping of the capital gains tax proposal. We’ve also seen rental growth of about 5% per annum and yields starting to rise a little.”

That means the environment is starting to look better for mortgaged investors. In CoreLogic’s data, the investors’ market share tends to fall away as the property gets more expensive. Yet, despite this, investors’ share of the market runs across all tiers and types of properties.

Interestingly, it is smaller investors who are leading the charge back, Davidson says. “We have seen a big spike in multiple property owners (MPOs) with just two properties (MPO 2s – aka mum and dad investors). That is where we have seen the change in terms of investor share.”

In recent months, MPO 2s’ share of purchases round New Zealand has gone up to 12% as compared to MPOs with 10 plus properties who account for a 5% share. In Auckland, MPO 2s also have a 12% share, but there’s less of a contrast with MPO 10s who have a 7% share.

For Davidson, this highlights that smaller players have driven the pickup in mortgaged investors in the market. “It will impact. Things have been flat for a while, but it’s starting to change. These investors will bring a harder nosed approach to pricing offers.”

It makes for a bit more market strength coming into next year, he says. “Maybe 2020 will be the year of the investor and investors will be driving the market.”

Going forward, there are also a number of other issues at play when considering the outlook for the market. These include the construction pipeline, population growth and the macroeconomic fundamentals (which are generally supportive, albeit softening).

Davidson says dwellings consents are at high levels and projected to rise another 15% out to 2024. If that translates into construction there’ll be an increase in stock, but infill housing and the demolition of existing stock lowers the stock change.

“It is only changing by about half as much as the consents. This suggests the negative view around prices out there is not well founded. Particularly as there’s still more people than new houses so demand is outpacing supply. And that equals price growth.”

Adding further support to the market is the lending environment. Record low interest rates and many lenders’ relaxing of serviceability criteria means it has eased a bit recently. While some have been picking that the Reserve Bank will further loosen LVRs later this year, Davidson says the latest strong lending figures put a question mark over that.

“The coming extra capital requirements for banks could impact longer term: mortgage rates could be as much as 1% higher than they would otherwise be by 2023. But, overall, we are looking at a gently easing lending environment that bodes well for sales and demand next year.”

There are looming headwinds but across the country there is more sales activity and that will support price increases, he says. “Things are looking more positive for the market. But don’t expect a boom. And I’m not sure about those predictions of 7-8% growth that we’ve seen. I think we are more likely to see a gentle rise and a return to more normalised trends.” ■