The Future of the Auckland Property Market

Mary

History has a way of repeating.  My strong gut feeling is that the present hysteria happening with the Auckland property market is a repeat of the hysteria of the late 80s, which led to a massive crash in both property and equities. The common denominator is that in neither case have the price increases been associated with increases in productivity – it is sheer speculation and fear of missing out.

Remember companies such as Landmark Properties, Robert Jones Investments, Chase Corporation, Judge Corporation, Kupe Group?  All invested heavily in commercial property only to see the value of their investments wiped out overnight.  Their values were based on emotion and a naïve belief that what went up would not come down.

The same is on the cards for the Auckland property market. Look at the fundamentals. Immigration is limited to returning kiwis. Incomes are static. The tourism industry is on life support. Retail is being sustained by government handouts.

Then you look at the more direct influences – lowered LVIs and low interest rates. Neither can be sustained long term. A more relaxed lending environment has enabled people who previously would not have been able to enter the market to buy on low or no deposits. Interest rates are their lowest in history. Once rates increase many borrowers will come unstuck. Many will have low or no equity and when the going gets tough many will just walk away from their properties.  It happened in the early 90s and can happen again.

In the 80s developers were using smoke and mirrors to “create” deposits, giving buyers credits that created the impression of a deposit.  In reality, they often went into a property with only a few thousand dollars.  When things came unstuck their $200,000 purchase sold at mortgagee sale for less than half that figure.

Today it is the government and government policy that is enabling people to enter the property market with little or no capital.

To see the crazy prices just compare a 2 bedroom townhouse in Cranbourne, Melbourne with something almost identical in Flat Bush. Both are outlying suburbs and both cram in modern, low maintenance townhouses on tiny plots of land. In Cranbourne, such a dwelling can be purchased for around $400,000 but in Flat Bush you are looking at closer to $700,000.  Yet in Australia incomes are some 30% higher than New Zealand. Figure that out.

There are things that can be done at the government level to reduce prices.  First, open up the supply of land.  Second, reform the Resource Management Act to streamline applications for developments.  Much of the cost of new subdivisions is the result of unnecessarily drawn out and cumbersome council approval processes.  Third – and I hate to suggest any new tax – reintroduce stamp duty. The requirement to pay stamp duty is a huge disincentive to property speculation.  Buyers cannot offset it or write it off and it encourages property owners to stay put and perhaps invest in renovations rather than flipping properties. New Zealand had stamp duty until it was abolished by the Lange/Douglas government in 1987.  It may be no coincidence that the speculative price bubble in New Zealand started at around that time.

My advice to anyone in the market right now would be to hold off. A price correction is on the cards.  It is anyone’s guess how extreme the correction will be. As one smart investor once told me, the time to buy is when there is blood on the floor.