Auckland house prices continue their relentless rise

Alistair Helm

In the space of just five years, the Auckland property market has risen by 52%.

Back in November 2008 the Stratified median price in Auckland as measured by the Real Estate Institute was $435,700.

The November sales data for 2013 shows that median price is now $664,100. Five years, a total increase of $228,400, that's more than the average annual earnings in Auckland over that period!

As ever peaks and troughs in property markets are only ever able to be judged in hindsight, but buying a property in November 2008 now seems like a smart move, although at the time there would be many calling it a risky move given the trend of declining prices at the time.

Future Trends
The question often asked in relation to the prediction of property prices is how best to judge future prices based on past trends. This is, as often stated, not an exact science. However with over 30 years of data from the Real Estate Institute it is certainly worth exploring.

For comparisons to be made from one time period to the next requires a degree of normalising; which when it comes to prices, whether that be for property or households goods means adjusting for the impact of inflation. The general rise in prices as a function of inflation is far different from specific price rises caused by pressure of supply or demand, as is often the case with property.

Using the Reserve Bank Inflation Calculator and applying it to the monthly data of Auckland Stratified Property Prices produces this chart below which shows a somewhat different picture as to price movement for the past 6 years.

Auckland Stratified Nov 13.png
 

Click any graph to zoom.

Auckland CPI adjusted recent years.png

 

The rise of 52% in today's dollars equates to a 37.8% increase when adjusted for inflation - still a significant rise over 5 years, however as can be seen almost all of that rise occurred in the past 2 years, as before that property prices adjusted for inflation hardly rose at all.

This steep rise of the past 2 years is pretty significant. From the starting point of October 2011 - 26 months ago the CPI adjusted Auckland median house price has risen by over 29%!

I thought it would be interesting to compare this rate of increase with the last time we experienced a very active period of house price growth back in 2002. That point was the start of what became a relentless rise which over a 5 year period saw property prices rise close to 70% in real terms, only ending with the start of the Global Financial Crisis.

Auckland CPI adjusted since 92.png
 

Taking just the comparable 26 month periods which commenced these periods of steep growth the period of December 2001 to Jan 2004 was a 27.2% rise. So by this measure we are current witnessing a faster rate of property price appreciation than the period cited by many as a period of rampant property inflation that we would never see the likes of again!

The question then has to be asked as to the likelihood of the property price appreciation continuing for another 3 years from now based on the parallel of the past 26 months of the 2001 run in property prices?

As ever that is a very hard call to make. The factors driving the rise in 2003/4 were very strong global economic activity backed by a strategy of targeted low interest rates as the US Federal Reserve sought to ensure the US economy staved off the recession and impacts of 9/11. Technology was driving prices lower and the powerhouse growth of China and the rest of  BRIC countries.

That was 2003/4, as to 2012/13 the world is emerging, still slowly from the GFC, the US economy and the British economy are picking up steam and the forecast for the NZ economy is for very strong growth, some say growth not seen since the 1970's. Add to this the migration expectations as they are likely to be felt more strongly in Auckland and then overlay the ever present issues about new construction of residential property and you have the seeds of strong factors for continuing property demand. Finally the cost of finance is targeted to rise, certainly a dampener on property prices, but when and by how much is debatable. In relative terms a 1% or 2% increase in mortgage rates will be significant when the current rate of 6%, but finance for property at 7.5% or 8% is in the long term still considered manageable.

In the short term the trend of property prices will likely be a slowing of growth. That is to say that when property prices take off as they have over the past 2 years the rate of growth has to slow as rises of 15% or put to 20% are unsustainable -  a 10% or below rate of annual growth is more likely - still seeing prices rise.

The chart below tracks the first 36 months of the property rises from December 2001 as measured as year on year growth and then tracks the 26 months of the 2011 to date run. An similarity of price growth trend - but very likely to tail off in the next 12 months. 

Auckland monthly growth comparison Nov 13.png

Former Realestate.co.nz CEO Alistair Helm is founder of Properazzi.

 

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21 Comments & Questions

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The middle and upper classes of New Zealand are willing on the increase in property prices whilst John Key has handed them another fillip with LVR policies. As the lower classes disappear in the rear view mirror, the gap between classes grows ever wider, potentially dangerously so over the coming years.

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1) LVR policies came from the RBNZ - not National

2) Let's call these low deposit mortgages what they are - SUBPRIME mortgages. Remember that little thing called the Global Financial Crisis which still haunts the world? Well - cause by subprime mortgages!

You think it's socially just for people who can ill afford a house and a massive mortgage are given them like candy? You think we should repeat the mistakes that have trapped countries like the US and UK for decades? All because you have so much irrational hatred towards party on the opposite side of the isle?

Think with your brain, man!

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Right on the money.

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Low deposit mortgages are NOT subprime mortgages. Just means you've got more skin in the game, which reduces the banks' exposure if they have to sell the property out from under you.

The reason they would have to sell from under you is because of the price deflation built into the scheme: they lend more than can be repaid from real economic growth. Instead they rely upon new entrants to keep house prices up. It's a hot potato -- you need to pass it on to a new loan-taker while you can still find one.

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Low Deposit and Subprime are very different. Subprime is a risky deal and the loan is 'loaned' out again and agin to cover risk across multiple lenders while a LVR is just a mortgage that has a 10% deposit or there abouts. You could have someone who earns $200k a year and wants to buy a house today but only has a 10% deposit for whatever reason. Thats not a subprime mortgage as the person has shed loads of cash to and stability to pay off the mortgage.

And your first point is garbage too - of course this policy came from National AND the RBNZ together.
Do some more research on exactly what caused the GFC and why NZ is so much different to the US and UK.

Think with your brain??...try using yours!

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Subprime and low deposit are different. Subprime technically is a US term that refers to borrowers with credit rating issues, therefore riskier buyers (higher chance of default/arrears).
But the underlying point is correct - low deposit borrowers are also higher risk for the bank and for the banking system as a whole and they should be restricted across the board. There is a lower equity buffer to cushion price falls (leverage is fantastic in a rising market, but apocalyptic in a declining market). The US and UK examples are perfectly relevant - had they better restricted banks' ability to make riskier loans (forget subprime, in the UK they were lending >100% LTVs!), there would have been less of an issue when the market turned down in 2008.
In NZ, we are now moving back to a normal interest rate environment after 5 years of artificial stimulus. The rising US dollar in response to Fed tapering gives the RBNZ more freedom to raise short term interest rates. Long term rates are already rising as AUS banks (which own NZ banks) fund all their mortgage lending from international money markets so they are already facing higher funding costs. This is well flagged and anyone who doesn't realise their mortgage bills are going up this year and next (30%+ per month) either lives in Antarctica or can't read.
The 2 key drivers of house prices are interest rates and unemployment. Forget the asset "value", it all comes down to whether you have the cashflow to service the mortgage (ie. do you have a job, and does it pay enough to service higher interest costs). Our GDP growth will cushion employment so we won't see a crash, but rising interest rates (with stagnant wage growth) will halt rises and probably cause a moderate decline in values across late 2014 and 2015.
For prospective buyers, best advice is to rent for the next 12 months or so and wait for prices to ease back. You will face the same interest rates regardless but will benefit from lower prices down track so will have a lower mortgage to service.
Forget false arguments about population growth. Last month's census results dispelled this as a myth and there is plenty of new build supply coming onto the market in Auckland.

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What else do you expect when the entire market is jacked by migrants sourcing their home mortgages from banks in China.

Keep filling the "Cake Tin" John.

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Stop your groundless mourning. I am a migrant for more than 10 years, every cent was hard earned here. My mortgage is entirely with ANZ. I think John Key is good, at least the welfare systems are less abused. Just could not imagine those who got $800 a week from W&I could not support their children.

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Since when was the ANZ a New Zealand bank?

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Auckland needs to introduce a capital gains tax..bottom line.. The place is in danger of becoming a Banana republic. The gap between the inner suburb 'land holders' and the rest of NZ is a bubble gone mad and will create an inter generational wealth gap in the coming decades. Get on to it Key/English and leave a legacy of making a courageous decision.

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Really a CGT will sort it out... ? Of course, like a comprehensive CGT has solved all the house inflation in Sydney. Hmmm, nah it hasn't even made a dent. Until supply meets demand, prices will rise. Building houses on the outer rim won't help if folk want to buy within a $50 cab ride from CBD.

I guess using your logic when the rebuild in Christchurch starts causing building material inflation we should just levy construction until it slows.

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Hi, yes introduce a capital gains tax in Auckland. We are not talking about Sydney.

Sort it said nothing about Christchurch. That is your logic by the looks.

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So in the face of empirical evidence that says that a CGT doesn't slow house price inflation, you would impose one on Auckland.

If you apply a CGT on Auckland, then to be equitable then you ought to impose a regional tax anywhere else there will be a source of household inflation.

The bottom line reality is that no-one is going to apply a CGT exclusively to Auckland - they simply won't be elected into government.

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Yes that is exactly what I am saying. Introduce capital gains tax in Auckland. I don't care about the empirical evidence says. NZ has a robust enough tax system that we can make it work.

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Can't wait for this bubble to burst and for the market to collapse.

Which it won't do of course because Key and his mates keep it inflated by having an open door migration policy with China.

Keep on clipping the ticket.

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The latest data just shows you that the LVR from the RBNZ has not and will not work, it's locked some first home buyers and the property investors have picked up the slack. If you have entry level house prices going up people are selling their first homes and trading up - not rocket science. I don't see prices appreciating for 3 more years, not with interest rates being increased by the banks already. At the end of the day these prices have been driven by low interest rates, short supply vs high demand (thanks to Auckland Council's RMA making too expensive, too hard to build affordable housing) and then there's the question of competition with building materials in the NZ market or lack of.

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Get out of Auckland.The price of a house anywhere else is half of Auckland. You will have a happier less stressful life, less traffic ,crime and congession.
When interest rates rise 2% plus the real pressure will apply. Rates are artificially low killing the supply and demand normalities.
Take advantage of the high prices, sell and get out.

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where have the medias darlings Trass and Hickey disappeared too?

Trass is bankrupted and Hickey headed south to dormant Wellington

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Rising house prices are fuelling lots of other spending, such as in luxury cars.

Perhaps we should all bid up the price of food -- spend $1000 for groceries each time you go, instead of $100. Then we'll have to borrow even more money and the economy will grow even faster.

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houses in auckland have gone up but have not reached their peak yet wait another 3 to 4 yrs that will be interesting sure interest rates will be high but so will the vaulue of your property compared to now.

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House prices are high because the Council policy is to drive them up by rationing land. Len Brown, who lives on a lifestyle block, believes that everybody else should live in a high rise apartments and flats that are environmentally and socially damaging and suck huge amounts of money out of the economy.

It is entirely a Council made disaster. In cities where urban growth is not so tightly restricted, house prices are three or four times annual salary. In Auckland they are seven times. Go figure.

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