Property in the spotlight shared by our Conveyancing Team

This property article was shared with you by our conveyancing team at Auckland law firm Quay Law.  Source: NZ Herald (14 September 2013)

Property valuer Quotable Value said this week house prices should keep rising for a further 15 months. Alanah Eriksen spoke to four experts about the present market, when it’s likely to cool, and how it compares to the 2002-2007 boom.

The Question | Why are house prices going up so rapidly?

The Auckland supply crisis is the overwhelming reason. There are too many people and too few homes in the city and it’s slowly filtering out to the regions.

There were 89,300 immigrants to New Zealand in the year to July 2013, up 7 per cent on last year, and fewer people are leaving.

Auckland Property Investors Association president David Whitburn said the city needed at least 10,000 dwellings per year to cater for excess demand but just 5300 building consents were issued in the past year.

Price issues had halted construction – timber and plasterboard were much cheaper in bigger economies like Australia and the US – as had a lack of skilled tradespeople.

Auckland University Real Estate Research Unit director James Young said looser lending and historically low interest rates were also contributing. Banks tightened up during the global financial crisis and house hunters would see a return of strict criteria when the Reserve Bank brought in new rules from October 1 that will see few people able to secure home loans of more than 80 per cent.

An overseas study in June showed New Zealand had the fourth most overvalued property prices in the developed world.

Haven’t we been here before?

A lot of the drivers of the present boom are reminiscent of the 2002-2007 boom – population growth, low interest rates, higher incomes and low housing consents.

But back then there was more building, says Real Estate Institute (Reinz) chief executive Helen O’Sullivan.

“Demand and supply were chasing each other up, whereas at the moment we just have demand chasing itself up.”

Reinz figures show the number of homes sold in March 2004 was 11,378, and 10,989 in March 2007. But this year, there were 8128 sales.

The other big difference was the boom spread further than Auckland last time. If you took Auckland and earthquake-stricken Christchurch out of the equation, the median price was relatively stable this time.

Attitudes to the two booms were also different – more people were buying and selling in 2007, but people now weren’t taking as much risk, O’Sullivan said.

“People are saying ‘Well, I can’t afford to sell or I’ll never get back in’. Second-home buyers are not selling their first home, they’re keeping it.”

One open home for a $665,000 house in Manukau saw 93 groups through. Only three had property they were looking to sell while the others were either first-home buyers, or people with other properties they didn’t intend to sell.
David Whitburn said: “Some people still remember the hurt in 2008 and the downturn really only ended in 2011. People are not so cavalier this time around.”

Tony Alexander, BNZ chief economist, said there was much more awareness of a shortage this time, research revealing just how many more houses were needed for our increasing population.

A number of global factors were in play during the last boom – the American invasion of Iraq in March 2003, worries about the Sars epidemic and inflation in the US which caused the Federal Reserve to drop their cash rate to 1 per cent, which in turn dropped New Zealand’s interest rates.

The New Zealand dollar was also very low, which delivered strong growth in the regions.

How much higher will property prices go?

Our experts hesitated to guess. O’Sullivan said she didn’t expect to see the present rate of property price increases (10 per cent in Auckland on last year and 6 per cent nationally) continue this time next year as supply increases and higher interest rates kicked in.

And while Whitburn called it “crystal ball-gazing stuff”, he predicted the Auckland region median price could go as high as $735,000 by July. It was likely to reach $695,000 by 2015 and $685,000 in July 2016.

“The council and central government would likely slash the red tape and allow developers to build more medium-density housing projects,” he said.

As a result, he said, we will see the market grow, but the median house price will actually come down as a result of more affordable homes on much smaller land or apartments being built, in a serious attempt to reduce the housing crisis and have 39,000 homes built over three years.

“In July 2016 the property cycle has a strong chance to have just started to turn into a recession.”

Nationally, house prices could reach $475,000 by next year, $505,000 in July 2015 and $520,000 in July 2016. Whitburn predicted areas like Waiheke Island, Rakino Island, Helensville and towns in the Franklin area might see a 30 per cent growth in prices.

Some of the more central suburbs would have less movement with affordability constraints as they had already done so well since late 2007.

Are we headed for a crash?

It depends who you ask. Helen O’Sullivan and Tony Alexander say not.

“What would give rise to a crash would be only a major drop in demand and I think there is so much pent-up demand that if prices did ease off, there’s that many people that have dropped out in discouragement that would be encouraged to have another go,” O’Sullivan said.

“Barring a major catastrophe, I can’t think what would bring about a major crash.”

James Young thinks the opposite.

“Things don’t go up forever … you’re about two years maximum away from a crash.”

He predicted new lending criteria would stifle borrowing, especially among first-home buyers.

Whitburn says we are headed for a crash “as surely as day follows night”.

“There are three phases to a property cycle. A boom, followed by a bust, then a recovery.”

The central bank held the official cash rate at a record-low 2.5 per cent as expected this week but said it was likely to rise next year, indicating a possible rise of 25 basis points by June 2014.

What will happen to my house?

If you live in Auckland, your house price will probably keep surging for at least two years, but the same rate of increase isn’t likely to happen in the regions, says Young.

David Whitburn said now was a perfect time for Aucklanders to sell – but not to buy.

Small towns like Kaitaia, Kaikohe, Murupara, Tokoroa, Taumarunui, Winton and Waipukurau were suffering population declines and house price dips of 25 per cent below their 2007 peak.

Helen O’Sullivan said house hunters needed to be open to the type of home and neighbourhood.

“Interest rates will rise. If you are struggling to sustain a mortgage at a price point now, or it’s terrifying, then it’s only going to get worse … Some people are hanging 10 until a bit more supply comes to market.

“But you’ve got to be realistic about the fact that we aren’t going to magically create another Meadowbank or another Pt Chevalier. There just isn’t any more land in the inner areas of the city, or it’s going to be more compact housing than we’re perhaps used to.”

And what about the age-old question – should homeowners fix or float their mortgage?

Whitburn, who owns several properties around Auckland, does both, as do many seasoned investors.

“It’s important to not have all your pricing come up at once. What you should do is spread your borrowing across different loan terms.”

What about first-home buyers?

All our experts say they should buy as soon as they have a deposit ready – don’t wait for a crash.

Whitburn praised the Government for raising the Welcome Home Loan house price cap from $400,000 to $485,000 in Auckland, effective from October 1. “Home-owners should buy now as prices are going up in the wake of continued under-supply that will take a decade to address and the demand is strong.”

Top of market buy still brings huge profit, despite warnings

When Hailey and Dave Bloore paid $485,000 for their tiny two-bedroom home during the height of the previous property boom, friends said they were crazy.

But they’re the ones laughing now, having just sold the house for almost double that.

No 10 Renton Rd in Mt Albert went for $805,000 under the hammer in the Barfoot & Thompson auction rooms – almost 50 per cent or $265,000 over the valuation of $540,000.

The couple bought the 1940s weatherboard former state house in 2006, when property prices were skyrocketing as part of the 2002-07 boom.

It was valued at $440,000 at the time so they paid 10 per cent more.

The house is just 82sq m but sits on a 613sq m section.

The Bloores, both 32, said they were “blown away” by how much the house sold for.

They had been renting the property when their landlord put it on the market.

“We just really liked living there and didn’t want to move, Mrs Bloore said.

“And there was so much frenzy around, people wanting to get into the market. We thought, ‘Shall we just buy it?”‘

At the time, banks were giving out loans of 100 per cent. Now, buyers will have to come up with a 20 per cent deposit.

“We didn’t have any money saved so we just went into the bank and they said ‘yes, you can borrow as much as you need’,” Mrs Bloore said.

“It seemed easy at the time.”

But money was tight with mortgage repayments almost triple the rent, she said.

“At the time it was a big stretch but just the idea of owning our own house, making it the way we wanted it was quite a good feeling, so we went for it.”

Mrs Bloore, a business development manager, said she was glad they bought when they did.

“When we bought it, we had a lot of friends telling us we were crazy, that the property market was going to come back. But we’re really glad we bought at the time because some of those friends still don’t have a house.

“It was right in the middle of the boom, and then it crashed.”

The couple, who have separated, are each hoping to buy again in the area and expect that with the new restrictions, there may be fewer people house-hunting so there will be more choice.

The house sold after a two-week marketing campaign which drew packed open homes, despite wet weather both weekends. The buyer was a single Auckland man.

To contact an Auckland property | conveyancing lawyer at Quay Law.