27 July 2016

Housing Trump Card

From Brexit to the unfolding train wreck of the US election, it all adds up to a high degree of global uncertainty. But is that good or bad for Auckland real estate?


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Unless you’ve been lost on your dream island holiday, you’ll have noticed global politics playing a major role in local economies of late. The rampant Auckland housing market can’t possibly remain immune.

From the successful Brexit campaign to the unfolding train wreck of the US election to the rising support for the extreme ends of the political spectrum throughout Europe and the dizzy turmoil of a painfully drawn out election across the Tasman, the current trend of events puts the spotlight on a huge chasm of voter dissatisfaction at divisions opening up to splice through the calm.

It all adds up to a high degree of global uncertainty. But is that good or bad for Auckland real estate?

The sharemarket definitely took a hit after Brexit and the Oz elections, says ASB economist Nick Tuffley.  “From a housing point of view, global uncertainty reinforces interest rates remaining low. It prevents people from investing in global and local shares.

“There will be some short term volatility for asset classes like shares and some people will steer towards bricks and mortar.”

For the New Zealand economy, there are slight negatives too, says Tuffley. “With 5% of exports going to the UK and the exchange rate weaker, they won’t be importing much. “The added strength of our currency over the past few weeks means the Reserve Bank is getting nervous and may cut rates even further. Interest rates will likely remain low. The question is, will the RB push them lower?”

That has huge ramifications for property as lower rates means housing becomes even more attractive. “The main risk is that house prices get too extended. It’s hard to see things settling back.”

Nick Tuffley, ASB economist.

Nick Tuffley, ASB economist.

And with the current supply/demand problem already causing jitters, the Government and the Reserve Bank are not happy.

Kiwibanks’ Zoe Wallis reminds us that New Zealand’s growth is currently heavily reliant on tourism and migration so we are affected by international events. “What’s going on in the rest of the world could see more interest  from foreigners wanting to move here and also more New Zealanders looking to move back home. It is estimated that over 60,000 New Zealanders are currently living in the UK.”

Brexit and US presidential candidate Donald Trump have triggered a 17% surge in searches of New Zealand property listings from Britain and America.

Brexit and US presidential candidate Donald Trump have triggered a 17% surge in searches of New Zealand property listings from Britain and America.

Concern over the Brexit outcome in the UK could impact job prospects, she says. New Zealanders might think it’s time to move home, specifically to Auckland because that’s where we typically see the most job opportunities arising, which would put further pressure on an already constrained housing market.

Spooked by his radical redneck policies, high profile Americans are also talking about heading our way if Trump gets into power. About 4000 arrivals come from the US compared to 13,000 from the UK. Working visa restrictions will stop the floodgates from opening but we could definitely see an increase from the US creating more pressure we don’t need.

Yet Wallis suggests Auckland could reach a tipping point. It already costs almost twice as much to buy a home in Auckland as it does in Christchurch. Auckland’s house price-to-income ratio is about 9 times compared with Christchurch which is 5.6 times and Wellington which is 5 times, according to the interest.co.nz website. “While there is a supply/demand problem in Auckland keeping prices high, people may start looking at buying in other areas, such as Hamilton and Tauranga.”

Zoe Wallis, Kiwibank Economist.

Zoe Wallis, Kiwibank Economist.

As divisions grow in our own political sphere and with an election looming in 2017, the Government is taking action. They have already issued instructions for the RB to rein in the pace of high house prices with new macro-prudential policies. The RBNZ has announced that it is looking at tightening restrictions on loan-to-value ratios (LVR) for new property investment that will require almost all property investors to have a minimum 40% deposit (although there is an exemption for new builds). This will replace the current 30% deposit required for Auckland property investment – broadening out the restrictions across the rest of the country. The change is set to come into force from 1 September 2016. In addition, the RBNZ is doing further work looking at bringing in debt-to-income (DTI) restrictions – although that would be a slow moving measure that would take at least 6 to 9 months to initiate and implement, says Wallis.

However they do it, the focus for the Government in Auckland, where most voters reside, is clearly on taming prices and providing expectations of future housing supply. The recently announced $1billion fund of interest free loans to speed up infrastructure is designed to alleviate the pressure. But infrastructure is a slow moving beast and in the meantime, Auckland house prices keep rising.

For Wallis, an even greater change-maker could come in the form of the new Unitary Plan, whose recommendations will be notified by August 19, 2016. The plan could change current land use restrictions to free up land for building on faster and possibly change height restrictions to allow greater building density around the inner city.  But still she says,  it will take two to three years to get a significant housing supply response.

New housing development, Flat Bush, Auckland.

New housing development, Flat Bush, Auckland.

“We expect the pace of price appreciation will pull back, but not actual prices. It’s not likely prices will fall unless we see a significant change of policy from the Government or Reserve Bank."says Wallis.

“Given the large net migration into Auckland and historical under-building of houses since the GFC, there’s still a supply demand imbalance that will support housing values over the next couple of years,” 

Both Wallis and Tuffley see the biggest changes happening further out, over the next five to seven years.

Says Wallis: “Net migration finally might start to turn around and housing supply will come on board because we’ll be frantically building for three to four years.  That could occur at about the same time as we start to see interest rate increases. If interest rates rise, it could have a big impact on housing as more people haven take on more debt to get into the market. Interest rate rises will bite as servicing costs go up and household consumption pulls back.”

A diverse world around us is undergoing huge change. Auckland’s housing dilemma is caught in the implications of national and global politics, pushing prices even higher. Government directives to resolve the situation are unlikely to accelerate at the pace required. In a year that's catch phrase is 'uncertainty' the only certainty is that the biggest impact on New Zealand's housing market will likely be driven from global influences. Whether that leads to house prices going up, down or reaching a plateau is not so easy to predict.

 

 

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