Home sweet home—a dream in a bubble or not?

Until June, the cost of property in Auckland rose by almost $500 a week for three months straight—a result of the economic bubble created in the real estate market. If the new reports are to be believed, the Auckland’s real estate market has hit its peak. One of the leading real estate agencies has come out with a report saying that in July, for the first time in many months, the average cost of the property plunged by almost $29,000. Although the market stabilised in August, it can be seen that the price rise has been slowing down in recently.
With average prices of the houses in the north shore, Manukau East, old Auckland city council region and other parts of Auckland hitting one million, it was obvious that these superficial property rates were buying their time.
The Reserve Bank cut the Official Cash Rate (OCR) by 25 basis points to three per cent, and many banks such as BNZ, ANZ, Kiwi bank and ASB have followed suit by cutting their interest rates. Today, the mortgage rates are the lowest in 60 years. The rates are expected to go down further, and according to experts, the rate is expected to be low for another 6–12 months.
Although the interest rate cuts are tempting, one needs to be careful and be aware of the correction in prices of the property from time to time. Indian Weekender caught up with financing and mortgage experts, Global Financial Services, and other real estate experts, to get an insight into the various issues clouding the minds of property buyers in Auckland.
How much will the property price fall if there is a correction in prices?
Experts: The key reason for the increase in property prices in Auckland is the imbalance in demand and supply of the houses. Until this imbalance is rectified, property prices are likely to increase. Correction in property prices in Auckland will take place but not immediately. It would also depend on how fast the government intends to correct the rates. The increase in prices has had a positive impact on the economy in recent times. It has also shielded the performance of the dairy sector of the entire country by a large extent. Apart from the policy change for lending by the banking sectors from October, there is little that the government has done to interfere in the real estate market. Therefore it will be safe to assume that even though the prices have almost peaked, they are here to stay for another 12 months at least.
So is it a right time to buy property?
Experts: There is never a right or a wrong time to buy a property. Always buy property on its merits after due diligence. The best advice would be to keep an eye on the market, policy changes of the government and banking sectors, which might affect rates in real estate.
Before buying a property, one should do a thorough research on the history of the property. It is important to know the highest and the lowest cost of the property in last five years in such times. This would help you know how the property fared during good and bad times in the past. It also helps to find out if the price of the property is going up in the market or is declining.
What does the new loan–to-value (LVR) restriction means to a buyer?
Experts: The new rules on LVR are applicable from October. The new lending rule is applicable mainly for purchasing investment properties in the Auckland Council region. This means, 30% deposits or equity is required if someone would like to purchase an investment property in the Auckland Council region. For purchasing property in other parts of New Zealand, these rules will not apply.
How difficult is it to get a loan? What are the options available?
Experts: Getting a loan is not difficult at all if one meets the lending criteria of the bank. It is at times advisable to approach a financial agency if one is not sure about where and how to seek loans.
Financial agencies such as Global Financial Services, help people with information about which bank can offer a better deal and are best suited for your requirement. If someone is not eligible for a loan in a particular bank, these agencies can help you with loan approvals in other banks, as lending criteria is not same across all banks. They can also bargain for suitable terms and conditions, as they have a strong relationship and understanding with banks.
Finally, it comes down to what your need is and how much you can afford. Managing finances will go a long way in being safe in the real estate market. However lucrative a property might look, rushing to buy an asset is never advisable. A holistic approach will always be productive. Although the capital gains of owning a property for a long time are huge, it is always better to understand the market to stay away from negative equity. One does not buy a property every day, so it is advisable to make an investment in a property that makes your home a better place to live.
*****
Recently, numerous reasons have been pointed out for the rise in property prices in Auckland. There have been debates at various forums and we have had the most controversial statements coming from the political arena. A section of it are blaming the government policies and importantly, offshore investment in Auckland’s real estate market.
Phil Twyford, spokesperson for housing of Labour party, which recently came out with a report of Chinese investment in Auckland’s real estate market, spoke exclusively to Indian Weekender and shared his views on why the prices of real estate in Auckland is going up. He also spoke in length about some of the policies that are affecting the prices of houses in Auckland.
IWK: What according to you is the situation like in Auckland’s real estate market? How affordable is a house for a common man?
Phil Twyford: The dream of an affordable home has almost disappeared for people in Auckland right now. Thirty years ago, the average price of a home was three times the home income. That according to the international standards is considered being affordable, whereas now, that ratio has gone up by 10 times. So it means that it takes an average of 50 years to pay off for a property in Auckland for a household. And that is why the mortgage rate is lowest in the last 50 years.
Auckland is a small city by international standards but according OECD, Auckland has some of the most unaffordable houses in the world when we compare the cost of houses to their incomes. So the situation is desperate.
IWK: What do you think is the root cause of the problem? Why are these prices going up?
PT: There are multiple reasons for the problem. Firstly, Auckland has a rising demand for houses because of its rising population. If the market was working properly, you would expect that the construction and development industry would meet the demand and supply of houses in the market. In the last few years, there has been an accumulated shortfall in houses. The productivity commission estimates this number to be 32,000At present, the industry is producing 8,000 houses per year when it needs to build 13,000 just to keep up with the population growth. So the gap is growing every year by 5,000 houses and the productivity commission estimates that by 2020, at the current rate, the number will increase from 32,000 to 60,000.
Now the big question is why isn’t the construction industry producing enough houses? One of the reasons is the way the council acts under the resource management act. Labour party thinks that we have to get our system working so we need to build more houses to eliminate the shortage and provide affordable houses for first-time buyers.
I would love to see more houses particularly in the areas where people want to live. For example, there is a restriction on height and density of the buildings in the city. A lot of people, especially youngsters and even the ones who have retired, do not want to live in the suburbs. They want to live in town houses and apartments. Those are some of the planning rules that need to be changed.
Another reason is the rise in prices of land. That is probably because of the growing demand. Also, we have had planning rules, which has restricted the supply of land, and when you create an artificial scarcity of land, the cost goes up.
There is also a problem with our construction industry. We have a boom and bust cycle. Real estate and construction go hand in hand. The real estate prices go up and when there is fall like we had during global economic fall, the demand falls. During the economic crisis, many skilled and trained people left the industry and went abroad. Now when the demand is high, the construction industry cannot scale up because there are not enough skilled people in the construction industry.
The Labour policy is Kiwibuild, under which we would build 10,000 houses a year, train people for the industry and sell affordable houses to first-time buyers. We will also help loan firms to evolve to finance construction of these houses and reinvest the money earned in the process to build more houses. So we are using the same money over and over again and that would stimulate demand.
Now that was about the construction side. Another problem in Auckland right now is from speculators and land bankers. In Auckland, if you want to get rich, people think the only way to do is by owning a property. Just through capital gains, a modest house in Auckland can earn you a lot more money than by working. The prices of the property have gone up by 25% last year. It is a tax-free gain. What is making matters worse is the fact that it is also attracting foreign investments.
What Labour wants to do is to crackdown on the speculators and change the policies that encourage property speculations.
We would also ban non-residents buying existing houses. This is the policy they have in Australia. What we are asking them is if they want to buy houses in New Zealand, come here and settle down in this country. Make a commitment to the country. If you are offshore and non-resident and want to own a property, the only way to do that would be to build a new house. That way you will be adding to the supply. For example, in Sydney and Melbourne, Chinese citizens are investing in real estate by funding the construction of apartments. That way, we can shape an agreeable policy, which encourages foreign investors to deliver you new home rather than having foreign investors competing with local first-time buyers.
IWK: Some say that there is this small real estate bubble that has been created in Auckland’s real estate market. Do you think that is true?
PT: We either have a bubble or something really close to it.
IWK: Dairy prices have crashed. Estimated GDP is only two per cent this year. With he Christchurch rebuilding process off its peak, some feel the only driving force of the economy at this point of time is the Auckland’s real estate market without which the economy will slump further.
PT: That is true. That is one of the reasons why the national government is so reluctant to do anything other than minor tinkering with their housing policies. Other things, like you are suggesting, are that there is little happening in the economy now. Christchurch rebuild has come down off the peak, the dairy sector is tanking and the only thing left is the housing bubble of Auckland. So for that reason, John Key’s government doesn’t want to do anything about foreign money coming into the market, as they feel it would have a dampening effect on the economy as a whole.
Another reason which is a bigger factor is the government’s thinking. John Key said that many Aucklanders, who own houses, want the prices of their houses going up because they would get wealthier. This is the most ridiculous thing that I have ever heard of, for two reasons. One is that if you own a property in Auckland, it is paper worth. You can never cash in that wealth unless you move out of Auckland. For most people in Auckland, it is not worth to move out of the city because of their work and family.
Secondly, if the prime minister of this country thinks that we will get wealthier by selling houses to each other, he is wrong. Real estate speculation is the most unproductive economic activity you can imagine. It does not generate wealth, jobs or exports for New Zealand. So national government policies are channelising vast amount of money into a very unproductive economic activity.
What I find most offensive about the prime minister’s statement is that half of the Aucklanders don’t own houses in the first place. The prime minister, through his policies, is sacrificing the whole generation of New Zealanders who are locked out of the housing market.
IWK: When do you think this bubble will explode? What do you think will be the consequences?
PT: Real estate market tends to move in cycles, and I am not in the business of predicting when and where the bubble might explode in Auckland. Like we all saw, after the global financial crisis, prices took a hit in Auckland and it paused before it took off again. But what I do know is that the current state of affairs is bad for the younger generation and bad for communities and bad for New Zealand. The housing situation in the market is increasing the inequality. The gap between the younger generation and baby boomers is growing big; the gap between the rich and poor is growing bigger. This is very bad for New Zealand.
Coming to the consequences, here I want to be really clear that I am not projecting that this will happen, but if the bubble does burst and if there were to be major correction in property prices, consequences could be disastrous. The worst situation could be that the house value would drop so steeply that a large number of people would find themselves in negative equity as happened in the US the during credit crunch. It could also have a serious recessional effect on the economy as a whole.
Due to the paucity of space, we will feature the other half of this interview in our next issue. In the meanwhile if you have any thoughts about the bubble” or are a first-home buyer and would like to share your experience with us, write to us at editor@indianweekender.co.nz
The story continues…
Until June, the cost of property in Auckland rose by almost $500 a week for three months straight—a result of the economic bubble created in the real estate market. If the new reports are to be believed, the Auckland’s real estate market has hit its peak. One of the leading real estate agencies has come out with a report saying that in July, for the first time in many months, the average cost of the property plunged by almost $29,000. Although the market stabilised in August, it can be seen that the price rise has been slowing down in recently.
With average prices of the houses in the north...
Until June, the cost of property in Auckland rose by almost $500 a week for three months straight—a result of the economic bubble created in the real estate market. If the new reports are to be believed, the Auckland’s real estate market has hit its peak. One of the leading real estate agencies has come out with a report saying that in July, for the first time in many months, the average cost of the property plunged by almost $29,000. Although the market stabilised in August, it can be seen that the price rise has been slowing down in recently.
With average prices of the houses in the north shore, Manukau East, old Auckland city council region and other parts of Auckland hitting one million, it was obvious that these superficial property rates were buying their time.
The Reserve Bank cut the Official Cash Rate (OCR) by 25 basis points to three per cent, and many banks such as BNZ, ANZ, Kiwi bank and ASB have followed suit by cutting their interest rates. Today, the mortgage rates are the lowest in 60 years. The rates are expected to go down further, and according to experts, the rate is expected to be low for another 6–12 months.
Although the interest rate cuts are tempting, one needs to be careful and be aware of the correction in prices of the property from time to time. Indian Weekender caught up with financing and mortgage experts, Global Financial Services, and other real estate experts, to get an insight into the various issues clouding the minds of property buyers in Auckland.
How much will the property price fall if there is a correction in prices?
Experts: The key reason for the increase in property prices in Auckland is the imbalance in demand and supply of the houses. Until this imbalance is rectified, property prices are likely to increase. Correction in property prices in Auckland will take place but not immediately. It would also depend on how fast the government intends to correct the rates. The increase in prices has had a positive impact on the economy in recent times. It has also shielded the performance of the dairy sector of the entire country by a large extent. Apart from the policy change for lending by the banking sectors from October, there is little that the government has done to interfere in the real estate market. Therefore it will be safe to assume that even though the prices have almost peaked, they are here to stay for another 12 months at least.
So is it a right time to buy property?
Experts: There is never a right or a wrong time to buy a property. Always buy property on its merits after due diligence. The best advice would be to keep an eye on the market, policy changes of the government and banking sectors, which might affect rates in real estate.
Before buying a property, one should do a thorough research on the history of the property. It is important to know the highest and the lowest cost of the property in last five years in such times. This would help you know how the property fared during good and bad times in the past. It also helps to find out if the price of the property is going up in the market or is declining.
What does the new loan–to-value (LVR) restriction means to a buyer?
Experts: The new rules on LVR are applicable from October. The new lending rule is applicable mainly for purchasing investment properties in the Auckland Council region. This means, 30% deposits or equity is required if someone would like to purchase an investment property in the Auckland Council region. For purchasing property in other parts of New Zealand, these rules will not apply.
How difficult is it to get a loan? What are the options available?
Experts: Getting a loan is not difficult at all if one meets the lending criteria of the bank. It is at times advisable to approach a financial agency if one is not sure about where and how to seek loans.
Financial agencies such as Global Financial Services, help people with information about which bank can offer a better deal and are best suited for your requirement. If someone is not eligible for a loan in a particular bank, these agencies can help you with loan approvals in other banks, as lending criteria is not same across all banks. They can also bargain for suitable terms and conditions, as they have a strong relationship and understanding with banks.
Finally, it comes down to what your need is and how much you can afford. Managing finances will go a long way in being safe in the real estate market. However lucrative a property might look, rushing to buy an asset is never advisable. A holistic approach will always be productive. Although the capital gains of owning a property for a long time are huge, it is always better to understand the market to stay away from negative equity. One does not buy a property every day, so it is advisable to make an investment in a property that makes your home a better place to live.
*****
Recently, numerous reasons have been pointed out for the rise in property prices in Auckland. There have been debates at various forums and we have had the most controversial statements coming from the political arena. A section of it are blaming the government policies and importantly, offshore investment in Auckland’s real estate market.
Phil Twyford, spokesperson for housing of Labour party, which recently came out with a report of Chinese investment in Auckland’s real estate market, spoke exclusively to Indian Weekender and shared his views on why the prices of real estate in Auckland is going up. He also spoke in length about some of the policies that are affecting the prices of houses in Auckland.
IWK: What according to you is the situation like in Auckland’s real estate market? How affordable is a house for a common man?
Phil Twyford: The dream of an affordable home has almost disappeared for people in Auckland right now. Thirty years ago, the average price of a home was three times the home income. That according to the international standards is considered being affordable, whereas now, that ratio has gone up by 10 times. So it means that it takes an average of 50 years to pay off for a property in Auckland for a household. And that is why the mortgage rate is lowest in the last 50 years.
Auckland is a small city by international standards but according OECD, Auckland has some of the most unaffordable houses in the world when we compare the cost of houses to their incomes. So the situation is desperate.
IWK: What do you think is the root cause of the problem? Why are these prices going up?
PT: There are multiple reasons for the problem. Firstly, Auckland has a rising demand for houses because of its rising population. If the market was working properly, you would expect that the construction and development industry would meet the demand and supply of houses in the market. In the last few years, there has been an accumulated shortfall in houses. The productivity commission estimates this number to be 32,000At present, the industry is producing 8,000 houses per year when it needs to build 13,000 just to keep up with the population growth. So the gap is growing every year by 5,000 houses and the productivity commission estimates that by 2020, at the current rate, the number will increase from 32,000 to 60,000.
Now the big question is why isn’t the construction industry producing enough houses? One of the reasons is the way the council acts under the resource management act. Labour party thinks that we have to get our system working so we need to build more houses to eliminate the shortage and provide affordable houses for first-time buyers.
I would love to see more houses particularly in the areas where people want to live. For example, there is a restriction on height and density of the buildings in the city. A lot of people, especially youngsters and even the ones who have retired, do not want to live in the suburbs. They want to live in town houses and apartments. Those are some of the planning rules that need to be changed.
Another reason is the rise in prices of land. That is probably because of the growing demand. Also, we have had planning rules, which has restricted the supply of land, and when you create an artificial scarcity of land, the cost goes up.
There is also a problem with our construction industry. We have a boom and bust cycle. Real estate and construction go hand in hand. The real estate prices go up and when there is fall like we had during global economic fall, the demand falls. During the economic crisis, many skilled and trained people left the industry and went abroad. Now when the demand is high, the construction industry cannot scale up because there are not enough skilled people in the construction industry.
The Labour policy is Kiwibuild, under which we would build 10,000 houses a year, train people for the industry and sell affordable houses to first-time buyers. We will also help loan firms to evolve to finance construction of these houses and reinvest the money earned in the process to build more houses. So we are using the same money over and over again and that would stimulate demand.
Now that was about the construction side. Another problem in Auckland right now is from speculators and land bankers. In Auckland, if you want to get rich, people think the only way to do is by owning a property. Just through capital gains, a modest house in Auckland can earn you a lot more money than by working. The prices of the property have gone up by 25% last year. It is a tax-free gain. What is making matters worse is the fact that it is also attracting foreign investments.
What Labour wants to do is to crackdown on the speculators and change the policies that encourage property speculations.
We would also ban non-residents buying existing houses. This is the policy they have in Australia. What we are asking them is if they want to buy houses in New Zealand, come here and settle down in this country. Make a commitment to the country. If you are offshore and non-resident and want to own a property, the only way to do that would be to build a new house. That way you will be adding to the supply. For example, in Sydney and Melbourne, Chinese citizens are investing in real estate by funding the construction of apartments. That way, we can shape an agreeable policy, which encourages foreign investors to deliver you new home rather than having foreign investors competing with local first-time buyers.
IWK: Some say that there is this small real estate bubble that has been created in Auckland’s real estate market. Do you think that is true?
PT: We either have a bubble or something really close to it.
IWK: Dairy prices have crashed. Estimated GDP is only two per cent this year. With he Christchurch rebuilding process off its peak, some feel the only driving force of the economy at this point of time is the Auckland’s real estate market without which the economy will slump further.
PT: That is true. That is one of the reasons why the national government is so reluctant to do anything other than minor tinkering with their housing policies. Other things, like you are suggesting, are that there is little happening in the economy now. Christchurch rebuild has come down off the peak, the dairy sector is tanking and the only thing left is the housing bubble of Auckland. So for that reason, John Key’s government doesn’t want to do anything about foreign money coming into the market, as they feel it would have a dampening effect on the economy as a whole.
Another reason which is a bigger factor is the government’s thinking. John Key said that many Aucklanders, who own houses, want the prices of their houses going up because they would get wealthier. This is the most ridiculous thing that I have ever heard of, for two reasons. One is that if you own a property in Auckland, it is paper worth. You can never cash in that wealth unless you move out of Auckland. For most people in Auckland, it is not worth to move out of the city because of their work and family.
Secondly, if the prime minister of this country thinks that we will get wealthier by selling houses to each other, he is wrong. Real estate speculation is the most unproductive economic activity you can imagine. It does not generate wealth, jobs or exports for New Zealand. So national government policies are channelising vast amount of money into a very unproductive economic activity.
What I find most offensive about the prime minister’s statement is that half of the Aucklanders don’t own houses in the first place. The prime minister, through his policies, is sacrificing the whole generation of New Zealanders who are locked out of the housing market.
IWK: When do you think this bubble will explode? What do you think will be the consequences?
PT: Real estate market tends to move in cycles, and I am not in the business of predicting when and where the bubble might explode in Auckland. Like we all saw, after the global financial crisis, prices took a hit in Auckland and it paused before it took off again. But what I do know is that the current state of affairs is bad for the younger generation and bad for communities and bad for New Zealand. The housing situation in the market is increasing the inequality. The gap between the younger generation and baby boomers is growing big; the gap between the rich and poor is growing bigger. This is very bad for New Zealand.
Coming to the consequences, here I want to be really clear that I am not projecting that this will happen, but if the bubble does burst and if there were to be major correction in property prices, consequences could be disastrous. The worst situation could be that the house value would drop so steeply that a large number of people would find themselves in negative equity as happened in the US the during credit crunch. It could also have a serious recessional effect on the economy as a whole.
Due to the paucity of space, we will feature the other half of this interview in our next issue. In the meanwhile if you have any thoughts about the bubble” or are a first-home buyer and would like to share your experience with us, write to us at editor@indianweekender.co.nz
The story continues…
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