How relevant is the CV of a property?

by Alistair Helm in


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The government valuation of a property, otherwise known as the rateable value or sometimes known as the CV in the case of Auckland, is the automated process whereby a value is applied to every address (comprising a land value and an improvement value) in an effort to fairly apportion local government rates. Like it, or hate it, rates needs to be levied on property / land owners and the method most commonly used is apportionment based on value.

As to the value or relevancy of this automated valuation in relation to the market price of property for sale, that is a subjective debate. Especially nowadays given the freely available automated valuations from the likes of Homes, Trade Me Property Insights and MyValocity. These valuation assessments are updated at least monthly whereas the process to establish rateable value is only undertaken on a 3 year cycle.

That being the case you would assume that the notion of a rateable value had become somewhat obsolete, relegated to the museum, much like Imperial measurements. That’s far from the case as the media is awash with references to RV / CV and no conversation with prospective buyers at open homes is complete with the question as to the property’s current CV.

The fact is that whilst recognised as being out of date as soon as it is published, the CV / RV of a property is a benchmark, and one anointed with the officialdom of local government which is why it perpetuates.


So now to some interesting analysis. In years gone by and especially in the most recent property boom of 2011 to 2016 and most especially in Auckland, the question has always been how much over CV were properties selling for? Was it 30% … 40% … or even 50%, such had been the accelerated inflation in property prices over the course of just a few years.

The fact is that by the time of the 2017 re-valuation process, Auckland CV’s generally were out of touch with sales prices by as much as 48%. That comparison to the CV by the time of the re-valuation was also the same during the prior period of 2011 to 2014.

The chart below tracks the median sale price in Auckland during the elapsed months from the re-valuation tracking the 2008, 2011 and 2014 re-valuations. The 2008 revaluation which is tracked in the chart from 2009 onward (as new CV’s are published in November) was noteworthy for the completely flat market during and immediately post GFC.


Now, if we add in the data for the past 18 months since the new CV’s were published at the end of 2017, the picture is revealing. At May of this year with the latest data from the Real Estate Institute we see that the median sales price of property in Auckland is running at a 5% drop compared to CV and heading on a trajectory that is well below the post GFC period of 2009 to 2011.

The question will soon be asked as to the re-valuation due to be undertaken a year from now in Auckland as to whether the re-evaluated CV’s might be lower than the 2017 figures. That would come as a shock to many, I suspect.


Is it better to rent or to buy?

by Alistair Helm in


Photo by   Pixabay   from   Pexels

Photo by Pixabay from Pexels

This is a simple question, but unfortunately it does not have a simple answer.

I was prompted to try and answer the question when I was contacted Susan Edmunds a journalist working with Stuff. I personally love to be asked these type of questions as they prompt me to delve into the data and seek out trends and insights.

The reality is .. it depends. It depends where you live, if you have a deposit, if you intend to live in the property for any length of time, how much you want to do to maintain the property, if you care about what place you live in, and so on. The provisos are endless and that is partly why there is no simple answer.

However you can apply a simple logic to the available data on sales prices and rents to at least provide an insight and that is what I have set out to do.

The approach I have taken is to keep it as simple as possible. I’ve posed the question, for a particular region of the country how much would you have paid in annual rent for the typical average property at a certain time over the past 19 years, and compared that with the pure cost of interest for a 2 year fixed term mortgage based on the median sales price for a typical property in the area at that same time. I have made a consistent assumption that the cost of buying the typical property would be with a 20% deposit. Sure this decreases the interest costs but as I have said I have tried to take a purely hypothetical and simple approach. I’ve then expressed this rental cost as a percentage of the mortgage cost. If the rent is less than the mortgage cost then it’s cheaper to rent and visa versa.

As a reference to the source of data. I have used the median sale price of all properties each month in each region based on the sales data from the Real Estate Institute of NZ. I’ve then applied the 2 year fixed interest mortgage rate from the Reserve Bank of NZ data, and I’ve used the Ministry of Business, Innovation & Employment who track the weekly rent based on bond data.

I know this methodology is way too simplistic, there are far more accurate calculations that would factor in the interest earned on the same deposit if you chose to rent, naturally also the value of any capital appreciation matched to maintenance and enhancement costs. Then there is the disturbance factor allied to the uncertainty of tenure of rent. I’ve also used large aggregated data sets whereas in a suburb the specifics of buying a 2 bedroom house as compared to renting a 2 bedroom house may well be massively different to the typical house within a city or region. As I say there are as many different ways to calculate this decision as there are rental properties.

Detailed below are the analysis of 13 regions of the country, all spanning the period from 2000 to 2019. The results are in someways surprising (I am not sure quite what I expected to find) and certainly interesting.


Northland

Starting at the top of the North Island with Northland the situation in April 2019 is that it is 4% cheaper to buy than to rent. The currently weekly rent is $388. The total rental cost per year then is $20,176 this compares to the current mortgage at 4.8% of a median sale price property of $507,000 equating to an annual interest charge of $19,469 - 4% cheaper to buy than rent.

Over the past 19 years the situation has certainly changed with the period from 2003 through to 2012 favouring renting, however since then the cheaper option has been to buy.


Auckland

It probably comes as no great surprise that the Auckland market favours renting. At this time it’s 11% cheaper to rent than to buy, with the median weekly rent at $561 equating to an annual rental cost of $29,172 vs. the interest component of the mortgage for a median sale priced property of $850,000 equating to $32,640.


Waikato

The Waikato region is currently hovering around the mid-point indicating that it’s a tough call based on the median weekly rent of $401 equating to an annual rental cost of $20,852 vs the mortgage interest cost on the median house price in April of $550,000 resulting in an interest cost of $21,120.


Bay of Plenty

Whilst the past 3 years has seen it cheaper to rent than to buy in the Bay of Plenty the last few months has seen this bias to renting decline as house prices hav plateaued and rents have continued to edge up. In April the median weekly rent of $440 equating to an annual rental cost of $22,880 vs the mortgage interest cost on the median house price in April of $600,000 resulting in an interest cost of $23,040.


Hawkes Bay

The Hawkes Bay region is pretty consistent in its data showing that it is cheaper to buy than to rent. This has been the situation for most of this century with only the period in the early years of the 2000’s when house prices rose on the back of relatively high interest rates. Since the GFC the low interest rates have favoured buying.

In April the median weekly rent of $399 equating to an annual rental cost of $20,748 vs the mortgage interest cost on the median house price in April of $465,000 resulting in an interest cost of $17,856, making it 16% cheaper to buy than to rent.


Taranaki

As of the data for April it is 21% cheaper to buy in the Taranaki region than to rent and this bias to buying over renting based on this simple method of calculation has predominated for most of the past two decades.

In April the median weekly rent of $344 equating to an annual rental cost of $17,888 vs the mortgage interest cost on the median house price in April of $385,000 resulting in an interest cost of $14,784.


Manawatu / Wanganui

For most of the past decade, post the GFC the benefits of buying over renting have been in then order of a 20% difference, at one time around 2015 it was a 50% cheaper option to buy than to rent.

In April the median weekly rent of $320 equating to an annual rental cost of $16,640 vs the mortgage interest cost on the median house price in April of $360,000 resulting in an interest cost of $13,824.


Wellington

There had to be one region of the country that was unequivocally in favour of renting and that is Wellington. Aside from literally one month in March 2016 before property prices started to rise significantly it was 2% cheaper to buy than rent. Today in April 2019 it is 3% cheaper to rent than to buy. This seems to fly in the face of the often reported state of the rental market in the Capital where demand always seem to outpace supply.

In April the median weekly rent of $529 equating to an annual rental cost of $27,508 vs the mortgage interest cost on the median house price in April of $737,500 resulting in an interest cost of $28,320.

As a slight side note the data set used for Wellington covers the wider Wellington region including the Hutt Valley and Kapati Coast and here would be a case of using a tighter geographical data set may well change the outcome for the decision.


Nelson

At this time the data shows that in Nelson there is no difference between renting or buying. Since 2016 the trend has been moving in favour of renting, however the majority of the past decade has been fairly well balanced between renting and buying.

In April the median weekly rent of $396 equating to an annual rental cost of $20,592 vs the mortgage interest cost on the median house price in April of $540,000 resulting in an interest cost of $20,736.


Marlborough

In contrast to its neighbouring region, Marlborough region clearly from the data shows it is cheaper to buy than to rent and has been the case for the vast majority of this decade. At this time it is 24% cheaper to buy in Marlborough based on median rent and median sale price.

In April the median weekly rent of $390 equating to an annual rental cost of $20,280 vs the mortgage interest cost on the median house price in April of $427,500 resulting in an interest cost of $16,416.


Canterbury

At this point in time based on April data it is 17% cheaper to buy in Canterbury than to rent. The median weekly rent of $396 equating to an annual rental cost of $20,592 vs the mortgage interest cost on the median house price in April of $460,000 resulting in an interest cost of $17,664.

Again as stated in reference to Wellington the Canterbury region is large and diverse and not wholly representative of say the Christchurch city or specific suburbs, this is where the data across a whole region can only provide an insight not the basis for a specific decision as to buying or renting.


Otago

Since 2011 the data clearly shows that the cheaper option across the Otago region is to buy rather than rent with the April data showing a 30% benefit.

In April the median weekly rent of $443 equating to an annual rental cost of $23,036 vs the mortgage interest cost on the median house price in April of $463,000 resulting in an interest cost of $17,779.


Southland

Outside of a short period running up to the GFC when interest rates rose the data clearly shows that the cheaper option across the Southland region is to buy rather than rent with the April data showing a 28% benefit.

In April the median weekly rent of $283 equating to an annual rental cost of $14,716 vs the mortgage interest cost on the median house price in April of $300,000 resulting in an interest cost of $11,520.


Are apartments showing much capital gain?

by Alistair Helm in


Photo by  Francesco Ungaro  from  Pexels

Photo by Francesco Ungaro from Pexels

The NZ apartment market is highly polarised around one city, and one district of that city. I am of course referring to Auckland City. Out of the total of 3,900 apartment sales across the whole country in the past year, more than 2,000 of them were in this tight geographical district.

Apartments, just as with all other segments of the property market have witnessed strong sale price growth over the past few decades. In the past 15 years the median sales price for apartments in Auckland City has risen from $220,000 to $545,000. More than doubling. However, that’s not quite keeping pace with the overall housing sector, and certainly not attaining quite the same capital growth.

An Auckland house bought in 2004 for the median sale price at the time of $342,000 would if sold in December 2018 at the then median sale price of $911,000 have gained $447,692 allowing for inflation. Equating to a 130% return on investment.

An apartment in the Auckland City purchased back in 2004 for the then median price of $220,000 would if sold in December of last year have gained $246,965 allowing for inflation. Equating to a 112% return on investment. A healthy return, off a lower initial investment.

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However as the above chart ably demonstrates such capital gains can be misleading when judging median sales prices over different time periods. For within this 15 year period there were significant periods when the gains were minimal and others where the gains were significant.

The first 7 year period of 2004 to 2011 through the GFC saw median sale price for Auckland City apartments rise and then fall so that the notional capital gain over that specific 7 year period was zero. Similarly though if you bought in 2011 at the then median sales price of $215,000, just 5 years later the median sale price had risen to $575,000, a rise of 167%. However over the most recent 2 years there has seen no rise in median sale price.

In many ways this volatility of capital gain is one of the core variables of the apartment market. It’s a market influenced to a far greater extent by supply and demand factors than the wider property market. Auckland city apartments experience very ‘lumpy’ periods of new supply which through their composition can significantly impacts median sales prices. Additionally such surges in supply naturally effect prices of existing inventory competing in the market at that time.


My interest in this category of apartments was peaked by a note sent to me by Simon Green from Queenstown who when reading my recent article on the comparison between the notional capital gains from Auckland houses as compared to those of Sydney and Melbourne over the past 15 years. He wanted to see how the apartment market was was fairing in those cities and also if I could look into the Queenstown apartment market. I must admit I had not in the past thought to examine this specific market, but questions like this always interest me. So for Simon’s benefit and others here is what I have uncovered.


The analysis of the apartment market comparing Auckland, Sydney and Melbourne is undertaken based on a model developed by Domain Group in Australia, one of the large digital property portals in Australia. Their analysis tracked the notional capital gain (adjusted for inflation) for time periods over the proceeding 15 years, based on the purchase date for an apartment sold in December 2018 at the then median price. So by example for an apartment bought in Sydney in March 2009, after inflation, that property would have netted a notional capital gain over the past 10 years of A$222,735, that would compare with the same time period in Melbourne of A$58,646 and in Auckland NZ$258,601.

The charts below track this 15 year notional capital appreciation of the 3 Australasian cities.

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Directly comparing these 3 cities on a common NZ dollar basis over the 15 years produces this summary of the very different markets.

Auckland Sydney and Melbourne apartments capital gain 2004 to 2018.png

There is without doubt a similar trend albeit with differing scale of capital growth over the 15 year period. It is surprising to me the lower levels of capital growth seen in Melbourne as compared to Sydney and then again the much higher capital growth for the Auckland market of apartments bought in the 2010 to 2013 period vs the current median price.

All markets are though clearly experiencing a recent 3 to 4 year period of negative growth over this near term.


Turning then to the Queenstown market for which I had no real perspective of the scale of the market before diving into the data. What I found was very interesting. Annual sales of apartments in the Queenstown Lakes district have averaged 116 with a peak in 2006 at 260 and a low in 2011 of 72. As far as the notional capital growth for apartments bought over the past 15 years as compared to the current median price the chart presented below is somewhat different to the main Australasian cities.

Queenstown apartments notion capital growth 2004 to 2018png

I recognise I am ill equipped to offer a commentary on this market trend so I take the opportunity to share the perspective of a local expert - Simon Green who furnished me with this response when I posed the question to him to provide background to the data.

“The data does actually make sense to me and I don't think there is necessarily any change in composition. It is a small dataset as the really are only a dozen or so major complexes in town and most of those were sold off plan pre-GFC with the bulk settling 2006-2008 so that part makes sense. There was also a large complex of 89 apartments that settled in 2009 which held pricing up as they had been sold a few years prior at top of market. From there we went into GFC proper - no buyers in market, a large number of mortgagee sales and and other "stressed" sales as income was very low in comparison to purchase prices.

Prices continued to fall for most part through to 2013 and has been recovering well since then due to improved income performance - but equally has been pulled back by a number of complexes now leaking.

Volume of sales remains fairly low compared to '06/'07, but has been due in many ways to owners being happy with their income and not really seeing any better investment opportunities. However, for the past 18 months or so buyer activity has dropped significantly. Prices have softened slightly, but the quality stock should hold its value as there isn't anything for sale and while income will not continue to grow the way it has over past 5-6 years, it shouldn't drop - so value.

So data does seem to reflect the market fairly well.”


Tauranga - a property hotspot

by Alistair Helm in


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This week saw a media article highlighting the un-affordability of Tauranga property. It also stated that the city was now the 12th most expensive city in the world.

I am really not sure where this data point comes from and sadly the publication - The NZ Herald, failed to substantiate the claim. Seems odd to me where a city of 125,000 people can be the 12th most unaffordable in the world, when there are over 1,000 cities nowadays with a population of more than 500,000 people with many in economically strong stable western economies. Anyway, I was drawn by the article to undertake some analysis to compare the property prices in Tauranga with Auckland just to see how different they are currently and historically.

Back when accurate reporting began of property prices in 1992 the typical property in Tauranga sold for $113,000. At that time the median property in Auckland sold for $135,000. Tauranga properties back in 1992 were 16% cheaper than Auckland properties. Fast forward 26 years and today Tauranga median sale price last month was $635,000 whereas the median sale price in Auckland was $835,000. Tauranga properties today are 24% cheaper. However whilst the relative gap has moved in favour of Tauranga as a cheaper place to buy there is no denying the underlying fact that Tauranga prices have seen more than a 4 fold increase in the past 26 years and Auckland a more than 5 fold increase. Again these factors of price growth are not unique to NZ as I recently outlined in the article "Do house prices quadruple every 20 years?".

To see just how this price inflation has played out over the past 26 years I have constructed this chart which tracks the percentage growth by month of the REINZ House Price Index using January 1992 as the base month which each month indexed as a percentage against it.

The property price inflation seen in this chart reflects the well documented property cycles experienced in NZ over the past 26 years. However there is a period within the Tauranga data that is very unusual and frankly pretty staggering.

During the period of just 20 months beginning in December 2014 and ending in August 2016 the House price index in Tauranga rose 50%. That is a staggering rise. Over those same period when the Auckland market was super hot the Auckland index rose just 34%. Compare that to the most recent 20 months leading up to the latest data for July 2018 - Tauranga's price index has risen by just 8% whilst Auckland has made a very modest 1% rise.

As to the comparison of Auckland property prices and Tauranga property prices today, as noted earlier, Tauranga median sale prices today are 24% cheaper than Auckland.

The median variance over the past 26 years is 21% cheaper; so today Tauranga property sales prices are a little bit cheaper than historical average against Auckland prices. Those are the facts of property statistics, I recognise that these facts are of little comfort as affordability, upon which the orgininal media article focused is all about income in comparison to price, and in that regard un-affordability in Auckland is as real as un-affordability in Tauranga.


The great Auckland property divide

by Alistair Helm in


As the topic of affordable housing continues to capture the headlines; the statement is so often made that Auckland is one of the least affordable places to live in the world. Now I don't propose to debate this question, outside of making the point that if house prices were unaffordable, as in truly unaffordable; then the demand would shrivel up and price expectation would adjust accordingly. Now I know this is a simplistic statement, and the fact is that property prices have more than doubled over the past decade pricing many out of the market. However the fact remains that every day 60 properties are bought and sold across Auckland at a median price of $835,000. By comparison I see that the average advertised price for all property in Great London is now NZ$1,169,000 and in Sydney the sale median price is now NZ$1,225,000. The common link is that all 3 cities are centres of innovation and economic growth and are the leading city of their respective country. It is also not surprising that all three cities are simultaneously experiencing house prices falling, such is the connectedness of global property prices.

This current median price of Auckland property of $835,000 is 84% higher than the median property sales price outside of Auckland, where the latest median price is $455,000.

I was curious to see how this premium for Auckland property had tracked over the past couple of decades to see just how relatively unaffordable Auckland had become in domestic terms and thereby provide insight into the property price divide between Auckland and the rest of NZ.

I have chosen not to use median price as the metric for this analysis. As I have mentioned in preceding articles my favoured measure is the Stratified Price Index provided by the Real Estate Institute. This is in my opinion, the most accurate measure of house sales price for comparative purposes.

So this analysis is presented in the chart below, it is to my way of thinking quite enlightening. At this time based on the price index Auckland is trading at a 95% premium to rest of the country. Three years ago the divide between Auckland prices and the rest of NZ peaked at 128%, with Auckland more than double the price in the rest of the country.

The Auckland divide of house prices comparing Auckland with the rest of NZ

The historical perspective is very interesting. Back when data was first reported by the Real Estate Institute in 1992, property prices in Auckland were 40% above that of the rest of the country, through the mid 90's that shot up to 80% premium, a level that was pretty much sustained through until the end of 2013. Then began a surge in prices outside of Auckland, at a time when Auckland prices were certainly rising. This pushed the divide down to just under 50% at around the start of the GFC.

The next 7 years from 2008 Auckland went on a relative rollercoaster ride as compared to the rest of the country driving the divide from 50% up an ever accelerating steep curve to top out in 2015 at that level of 128%.

Given the current picture of property prices outside of Auckland compared to Auckland it is very likely that the divide will continue to fall in the coming year reducing the Auckland premium from 95% closer to 75% / 80%.


Do house prices quadruple every 20 years?

by Alistair Helm in


No sooner had I written the article "Do house prices double every 10 years?" than I get the question posted on LinkedIn as to whether house prices quadruple every 20 years?

My first reaction was - No Way, if they double in 10 years, how could they possibly quadruple in 20 years? - to be clear $100 doubling in 10 years becomes $200 and within 20 years quadrupling to $400. But then I remembered the good old adage of compound interest. The annual rate of growth to double a sum of money in 10 years is 7.2% and that same 7.2% annual growth rate compounded will quadruple the original sum within a 20 year timespan.

The next question for me was to Google the question, just as I did with doubling house prices, not 339 million results this time just 8 million. But top of the results from The Telegraph in the UK with a 2003 article stating just that fact. Between 1983 and 2003 average house prices went from £29,993 to £121,742 – a quadrupling. As an aside I bought my first house in the UK in 1984 for £22,150 so I can confirm that is what a typical house cost back then. I sold that house in 1985 for £20,650 so clearly I should have waited!

Anyway I digress. Back to the question posed on LinkedIn. Given the fact that NZ property prices have doubled during some 10 year periods, have we seen quadrupling over any 20 year period?

The answer is yes for Auckland but not for the rest of the country in aggregate. I have only been able to assess the period from 2012 as the available data from REINZ of sale price data only goes back to 1992. Here then are the same charts I used in the prior article adapted to track each 20 year period from 2012 to 2018.


NEW ZEALAND - ALL PROPERTIES

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So for the period from 2012 onwards the 20 year rise in house prices across all of NZ was an average of 237%, that is over a three fold increase but at no time has a quadrupling been experienced. Of note is the fact that the current period June 1998 to June 2018 at 271% is the highest ever 20 year rise.


AUCKLAND

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In the case of Auckland the average 20 year period price rise has been 296% between 2012 and 2018. In 31 of the 78 months the 20 year rise was more than quadrupling of prices in that 20 year period. The highest ever rise was for the period from August 1995 to August 2015 which saw a 329% increase.


NEW ZEALAND EXCLUDING AUCKLAND

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For the rest of NZ excluding Auckland the average 20 year price growth has been 197%, so just under a trebling of prices over a 20 year period. Of note though is the steady rise in the price rises since 2015 with the latest month of June recording a 240% increase in prices since June 1998.

 

 


Do house prices double every 10 years?

by Alistair Helm in


It's a fairly commonly held belief that house prices double every 10 years.

Is is correct? can it be guaranteed? and is there fact to back up the assertion? In researching this question, I found that asking the question on Google "Do house prices double every 10 years" provides a pretty comprehensive pedigree of search results, 339 million to be exact.

Among the top results I found that, an Australasian report by Core Logic which analysed the two 10 year periods from 1996 to 2006 and from 2006 to 2016. The earlier period did see consistent doubling (or more) of house prices across the major metros, whilst the later period only saw a doubling in Melbourne whilst Sydney managed a 78% rise.

The UK has similarly experienced doubling in house prices over 10 year periods with an excellent analysis by Alex King providing facts adjusted for inflation covering many decades.

Before diving into the NZ data, it is worth reminding ourselves of the mathematical fact that for a sum of money to double in 10 years requires an annual compound interest factor of just over 7%.


New Zealand - Total All Properties

Using the REINZ House Price Index as the measure of house sales price tracking back to 1992 I have created this chart below to best answer the question - do house prices double every 10 years? Simply viewed each bar represents the rise in prices for a 10 year period.

The black horizontal bar shows the 100% increase threshold. It can be very clearly seen that from October 2003 right through to November 2011, (with just a short period in 2009) property prices doubled, comparing a single month with the same month 10 years ago. The peak rise in any 10 year period was around mid 2007 (just prior to the GFC) when 10 year price rises topped out at just below 120%. 

The period since the end of 2011 though has refuted the claim of doubling prices every 10 years. Over the past 7 years, 10 year growth has been well shy of doubling, achieving around an average of 65% growth in each 10 year period.

Across the 26 years (198 months) the average 10 year rise was 88% with the median rise in any 10 year period 97%. Over that 26 year period just under half the time (43%) saw prices doubling or more


Auckland

So what about Auckland, the leading metropolitan region of the country? - most of the media portray the Auckland market are constantly bubbling and among the most expensive cities to live in. What does the data show?

This chart is certainly illuminating and somewhat surprising. Compared to all of NZ, Auckland has sustained a relatively consistent higher 10 year growth in prices with an average 10 year growth of 98%, well ahead of the NZ total at 88%. However the periods during which a doubling was seen were fewer and not aligned to those of those of total NZ. In just 72 of the 198 months was a 10 year doubling witnessed - less than the 85 for total NZ and the highest 10 year rises where in early years of the new millennium and the recent boom cycle.


Total New Zealand excluding Auckland

If you extract the Auckland price rises from New Zealand in total you get a very different answer to the question - do house price double every 10 years?

During the period of 2005 and 2008 in the run up to the GFC the 10 year respective rise 10 years later as seen between 2015 and 2018 property sales prices outside of Auckland would be barely 40% which is an equivalent rate of 3.4%, certainly ahead of inflation but probably below the prevailing mortgage rates for the period.

So can it be said that property prices double every 10 years? - clearly not; as to make such a statement is always made assuming the past is the best indicator of the future which we all know is wrong. However it would be true to state that in the case of Auckland that over the past 20 years property prices have pretty much consistently doubled every 10 years as the median 10 year rise is 96%. 


Subsequent to writing this article I was asked via a question on LinkedIn as to whether property prices quadrupled over a 20 year period. I had not heard such an assertion, however upon Googling I found it was quoted as a fact. So I naturally went and did the analysis and then wrote this article - Do house prices quadruple every 20 years?


The property market cycles of the past 25 years

by Alistair Helm in


When property prices are on the rise, the commonly asked  questions are usually based around how long can this bull run last?; are we in a bubble?; or have prices become disconnected from reality?

All are fair questions. However what is really interesting is the fact that these questions tend to float to the surface of the media precisely at the end of a property cycle. Property cycles are a historic part of the property market, here in NZ and globally. These cycles tend to last around 5 years and represent periods of either stagnant growth, accelerated growth and in some case declines.

In an article I wrote a few months ago I isolated the key periods of the property market identifying 5 periods tracking the median price data provided by The Real Estate Institute for over 25 years. Those 5 periods comprised 3 periods of rising prices and 2 of plateauing prices. The chart below reflects this perspective.

Interestingly I was sharing this insight the other day to a group of real estate colleagues as we reviewed the state of the current market. We are currently in a plateau phase - certainly in Auckland. The question I was asked of this chart, was as to the relative rate of increase during each of these periods as there is a perspective that property prices grew faster in the recent 5 years as compared to the 2002 to 2007 period and certainly as compared to the 1992 to 1997 period. I pointed out that this chart can be deceptive. The representation with a vertical axis of the actual median price can be misleading as a 100% increase from $100,000 to $200,000 as was the case in the 90's represented a dollar rise of $100,000; however a dollar rise of $100,000 in say 2008 from $350,000 to $450,000 only represents a 29% increase.

This got me thinking as to whether there was a better way to represent the trends of these cycles.

A couple of hours work has brought me to this new analysis of the property market cycles of the past 25 years.

Firstly I have chosen to use a different data set from The Real Estate Institute of New Zealand for analysing the market. I have chosen to use the House Price Index (HPI) - this data set is probably the most reliable and accurate data set for property sales prices in NZ. The Index which was developed by REINZ in cooperation with the Reserve Bank of NZ ensures that this price data set is not effected, as it can be by composition changes. That is to say if in a month a higher proportion of sales occur in a relative price band or suburb set this can skew the median price which is the most common and trusted method of sale price calculation.

I also decided that I would analyse two data sets namely Auckland, and NZ excluding Auckland. The fact is a single NZ data set is itself a compositional skewed data set as Auckland being c.40% of the market heavily skews the National picture which then becomes irrelevant for properties outside of Auckland. (More of this is a future article).

The chart below tracks the House Price Index from 1992 to date, for the data set of Auckland and Total NZ excluding Auckland. The Index is centred in 2003 at 1,000 points with dates before that being below 1,000 and dates afterwards being above 1,000. A figure of 1,100 represents a 10% increase over the base month in 2003. A figure of 2,000 being a 100% increase over the base month in 2003 and so on. The latest HPI data from REINZ for May 2018 had an Index of 2,883 for Auckland and 2,554 for all of NZ excluding Auckland.

This chart is very illuminating as it shows very clearly the plateau the Auckland market has been experiencing since reaching 2,800 in August 2016 - nearly two years ago. It also very clearly shows the extent to which the Index for NZ property sales price excluding Auckland shot away in the 2003 to 2007 period. The index to 2003 though in someways confuses the visualisation. I therefore decided to recalibrate the index it back to 1992, as the revised chart shows below.

Now back to that opening question - what are the key cycles of the property market of the past 25 years and how similar or different are they?

Here is a more detailed analysis of the price index data I have concluded upon for which I have identified not 5 but actually 7 phases of the property market over the past 25 years.

Now before you email or call me to ask what on earth I have created, let me explain. I have taken the HPI data and broken it up into these 7 periods or phases of the past 25 years which are tracked along the horizontal axis from 1992 to 2018. For each of the 7 phases I have identified the inflection point and recalibrated the start point to zero. So let me walk you through the 7 periods to help explain.

Period 1 - January 1992 to February 1993

Just a one year period which saw the price index grow by just 7% for Auckland and 7% outside of Auckland. This is subjectively an odd data set as there is no record of what happened pre-1992 and especially from the after affects of the stock market crash of 1987. Best to disregard this phase.

Period 2 - March 1993 to March 1996

Now this was a period of significant price growth. Auckland price index leapt 68% in just 3 years whilst outside of Auckland the price index went up 22%. This 3 year rise of 68% in Auckland is the fastest rise that has ever been seen over the past 25 years.

Period 3 - April 1996 to January 2002

This period of close to 6 years included the Asian Financial crisis and saw property prices stagnate. By the end of the period Auckland price index had risen by just 10% and the rest of NZ excluding Auckland 12%. Twice during that period Auckland prices dipped. By 5% in the first few months after April 1996 and then again late in 1998 dipping by 3%.

Period 4 - February 2002 to November 2007

This would be viewed by many as the most explosive period of property price growth. In the five and a half year period the property price index for NZ excluding Auckland more than doubled, rising 116%, far outpacing the rise in Auckland of 89%. All of this of course foreshadowed the GFC.

Period 5 - December 2007 to December 2009

For a full 2 year period the property market went into a funk. Prices went down. A scenario that many thought would never happen just a few years earlier, however property prices will at some point, just as with all assets; go down in value as much as they may go up. For Auckland the price index slipped 12% in the first 12 months before easing back to be down 3% by the end of the second 12 month period. For outside of Auckland the level of price fall was less severe, down 9% in the first year before clawing back half of that to be 5% down after 2 years.

Period 6 - January 2010 to January 2013

A full 3 years in which property price index rose just 2% outside of Auckland, spending the first 2 years underwater adding to the prior 2 year period making a full 5 years when properties collectively outside of Auckland failed to recover the peak they had attained in late 2007. For Auckland the recovery from the GFC came earlier with this 3 year period seeing a modest sustained growth up 18% over the 3 years.

Period 7 - February 2013 to date (May 2018)

This current 5 year period may in later years be revised to a 4 year period ending in August 2016 when Auckland's property price index peaked up 70% in that period of three and a half years, close on the same rate of growth seen back in the '93 to '96 period. At the same time for properties outside of Auckland the price index keeps rising, up 49% over this 5 year period, the second highest rate of growth of the past 25 years.

So in conclusion, property markets move in cycles and these cycles lead to price movements. It is likely, based on historical evidence of the past 25 years that we are in, or will be shortly be entering a plateau phase, typically these periods can last from 3 to 6 years dependent upon the background economic circumstances. As to when this period started, in the case of Auckland we may already be 2 years into it. In the case of the rest of NZ it maybe that we are about to see this plateauing start very soon. If there is any silver lining it should be seen that a correction that sees property prices fall is less likely and with a strong economy we are likely to see property prices take off again within the next decade. The only certainty is that it is almost always impossible to identify the infection point until after the event !


Are we really facing a “serious shortage of properties for keen buyers”?

by Alistair Helm in


Shortage iStock_000009057106Small.jpg

It's funny sometimes when you look at a piece of research which on the face of it looks to be enlightening, providing as it does new facts and insight; but when dig a little deeper you discover that it merely reinforces known facts.

Such was the situation this week when Realestate.co.nz published a research study by Horizon Research of consumer expectations of buying and selling in the coming year. I was at first somewhat confused, as the report was completely buried in the monthly NZ Property Report. I was not sure that they had clearly thought through how they were presenting the data, however by tuning out the monthly stat charts the research data findings seem at first eye-opening.

The research results show that 6.4% of the adults 18 years or over surveyed are definitely looking to buy in the next 12 months, but only 2.8% of people stated they are definitely looking to sell in that same period, says realestate.co.nz spokesperson Vanessa Taylor.  

This equates to a shortage of around 3.6% of homes across the New Zealand marketplace, representing a significant number of properties currently not on the market, she says.

Even taking into account new builds which are underway and not included in these numbers, there will be an increasingly serious shortage of properties for keen buyers.
— Vanessa Taylor - Realestate.co.nz

Wow – 6.4% of adults definitely going to buy; but only 2.8% going to sell! As stated that would seem to be a “serious shortage of properties for keen buyers”

The danger as ever with statistics is that seeing one set of data in isolation can lead to misinterpretation. Sure, in this survey 6.4% of adults are going to buy vs 2.8% are going to sell. On the face of it, it certainly seems serious and due cause for alarm, especially when we are constantly being told in the media (and by politicians) that we need to build more houses to solve a housing crisis. But hold on a moment. Step back and ask what is the context of this research data. We need to ask how have results changed over the past year or the past 5 years? Are we seeing a growing trend or a declining trend? After all one data point does not tell us everything.

The beauty of the internet is that you don’t have to hound people to get them to provide the data, the data is accessible. Horizon Research has been undertaking a Housing Supply and Demand Survey since 2010 on a fairly frequent basis and here are the results.

So it would appear that the data for May whilst perceived to be high was actually down on the previous report from October last year, when the level of definite buyer activity was 9.8% and seller intention was just 2.5%. That’s 1 in 10 adults saying that they were going to definitely buy. At the same time just 1 in 40 adults said they were going to definitely sell!

How did I possibly miss that piece of news?

There is no denying that the chart very clearly shows an ever growing divergence between buyer intent and seller intent, however the question has to be asked. If as the media release this week states … will there bean “increasingly serious shortage of properties for keen buyers”?

How could this be true? Especially if we have witnessed this divergence for the past couple of years. If it were as true as the statement leads us to believe, then surely we would be seeing rampant price inflation as this pressure on supply would seem to portend?

To answer this key question we need to separate the buyer and seller data in the research.

The Buyers

First let’s deal with the data of buyer intent. The latest May research states that 6.4% of adults definitely intend to buy in the next 12 months. Let's work through the numbers. In NZ there are 2.7 million adults; being 60% of the population by age between 18 and 65.

The research states that the findings based on a sample size of 1,345 adults from a nationally representative panel show that 6.4% state that they are definitely going to buy a property in the next 12 months. The average household composition of adults in NZ is 2.02 adults per household which equates to 1.34 million properties. This reflects the 85% of private property occupied by adults under 65 years. If you apply the 6.4% proportion from the May research to this total of 1.34 million properties you arrive at the figure of 85,700 properties definitely going to be bought in the next 12 months.

A total of 85,700 properties being bought in the coming year is in fact a perfect estimate of the market. In the past 12 months volume sales as reported by the Real Estate Institute were 74,600. Sales volumes have begun rising from a low of 73,500 in the 12 months to December last year. So I would say that the research is bang on as an estimator of market demand, providing an accurate guide as to the likely pick up in sales volumes for total 2018/19.

What is also interesting in extending this calculation; is that the historical research carried out by Horizon Research shows that the past 8 years data correlates quite closely (with just a few outliers) with the market trend of moving annual total sales as highlighted in the chart below:

The Sellers

So how can the divergence of buying intention from selling intention be explained? How can it be that what we can validate that 6.4% of adults definitely intent to buy, but clearly far more than 2.8% definitely intend to sell? In fact we can I judge with confidence say that 6.4% of adults will sell in the next 12 months.

Herein lies the answer, in my opinion.

Existing homeowners go through a process. A process that ends up with the purchase of one house and the sale of another, however this process from a psychological perspective does not begin with a rational intent to sell. It starts with an intention to buy.

Selling a property is a means to an end; the end being the next home. It is a functional process, not an emotional decision process – the emotions lie in the expectation around the next home. So when asked in a survey the intention to sell, the typical adult probably under-reports, largely due to the anxiety and expectation surrounding the process of selling. That is my opinion.

So I don’t support the view that we are really facing a “serious shortage of properties for keen buyers”, we are simply seeing the normal property market at work.

This thinking is very enlightening to the processes of real estate industry in general and particularly to the marketing strategies adopted by players within the industry. I highlighted recently in my article about the likely launch of Better Homes and Gardens Real Estate how their brand positioning would not play out so well in NZ as the market here is a vendor (sellers’) market and their brand is all about emotional inspiration and lifestyle.

The fact is NZ real estate companies largely focus on the processes of selling and buying linking the brand to the "For Sale" event, but I have not seen many (if any) real estate companies, nor for that matter any real estate websites position their brand around the emotionally engaging process of discovery, in the process of finding your next home.

 

 

 

 


The Auckland quarterly property review - Q1 2018

by Alistair Helm in


Quarterly Review logo.png

Having summarised the broad New Zealand property market for the 1st quarter of 2018, it is critical to examine separately the Auckland property market.

Auckland is a very different market to the rest of the country by fact of scale and greater international influences. Additionally Auckland tends to be a bell-weather to the broader regional market, thereby investigating the local market trends provides insight both for Aucklanders and as a future indicator for the rest of the country.

As far as volume sales are concerned it appears from the latest March data to the end of this first quarter of the year, that we seem to have bottomed out. Sales of properties have been falling for close to two and a half years. Seen on a 12-month-moving-total the Auckland market peaked in October of 2015 and has fallen in volume terms consecutively by 37% since then to the current March 12-month-total of 21,350 sales. We do seem to have avoided dropping below the 20,000 sales a year threshold experienced through the GFC and the rebound in 2011.

The chart below tracks the monthly variance for a year-on-year comparison of Auckland property sales for the past 18 years. It is clear looking at the chart that the market experiences significant volatility in sales movements in Auckland, up over 50% year-on-year at times and equally falling by similar variances. Since that peak in October 2015 the variance has been consistently negative with just couple of months where there was a small correction. As noted in the wider NZ analysis the March month this year did see a surprising fall year-on-year in sales but this is not unusual as can be seen in prior market cycles of the past 18 years.

As I have mentioned many time in the past in the context of property market commentary, a critical issue in NZ analysis of property sales is the number of dwellings and how that has grown over time. In the case of Auckland, hardly a day goes by when the media does not refer to the 'shortfall in housing' affecting the city - whether that shortfall is 20,000 or 50,000 the fact is Auckland has grown at a staggering rate over the past 25 years. 

Based on the trending of the last census data it is likely that Auckland now has surpassed 500,000 dwellings - this is up from around 445,000 10 years ago. This growing level of new dwellings naturally will be a factor in assessing the true level of property sales. Tracking this over the past 10 years further reinforces the market view that we are bottoming out of the cycle at a low level of 4.3% of all homes being sold in the past 12 months, this compared to a 10 year average of 5.4%. The broader NZ position interestingly is that 4.5% of all homes were sold in the past 12 months as compared to a 10 year average of 4.7% emphasing that the Auckland market has fallen in volume terms further than the rest of the country.

As I have often stated I am of the belief that watching closely the sales volume trend is a better indicator of the state of the property market than following the median price, as price is largely a reflection of the state of the market rather than an indicator. This is best demonstrated by the chart below. This analysis which I introduced a couple of months ago tracks the clearance rate to the median price movement. Clearance rate is the relationship between the new listings coming onto the market in a 12 month period of and number of sales.

This latest update to the Auckland chart of Clearance rate to median price shows again evidences the bottoming out in the clearance rate and the start of some degree of increase in the past 4 months, whilst at the same time the median price variance year-on-year is showing an arresting of the fall seen in the past 2 years with the current situation seeing median price level or slightly down compared to this time last year.


The NZ quarterly property review - Q1 2018

by Alistair Helm in ,


Quarterly Review logo.png

The first quarter of 2018 is now behind us and with it the final month of the financial year. It is interesting as an aside that this last month of the financial year, through no direct result of any promotion or marketing by this industry towards the consumer, typically ends up being one of the biggest sales months of the year. Sure it's influenced by seasonal considerations but their is no denying the fact that incentives within the industry do bring more properties 'across the line' into March than would be the case without these incentives.

With that as a backdrop it is a good stage of the year to examine the state of the market from the available published data from both Realestate.co.nz and REINZ.

I always like to start any property market analysis with sales volumes as this for me is the most important driver. The Median Sales price whilst the headline of all property news articles is largely an outcome of the market, the result of the pressures of the market; but the number of transactions indicates the real health of the market.

Across the whole of the country, sales volumes have been weak now for what is close on 2 years. As the chart below shows, the market year-on-year variance dropped into negative territory nearly 2 years ago in July 2016. 

In the middle of last year after 12 months of declining sales we started to see the rate of decline ease off, and as we reached Christmas, year-on-year sales were pretty close to level with prior year. This was followed in January and February of this new year by very slight rises year-on-year, but then March seems to have hit us and we are back year-on-year to a 9% decline. This is why I made the comment earlier. I had expected that March would have been stronger than it was. For whilst comparing the same influence on the market last year, 9% decline after what has been very low sales volumes is surprising and has that feel of a 'late spring frost' arresting the early new spring growth.

Yet despite this 'snap of frost', it is my view that we are still likely to see sales volumes rising through 2018 to end well ahead of 2017. The most recent 12 month total sales volume to March was exactly 73,000 as reported by REINZ. This level of sales is almost identical to the low point of the last cycle in October 2014 before the upswing in sales that lasted for the next 18 month as sales rose to a 12 month moving total of 94,000.

When examining property sales over a long term perspective, a key influence that has to be factored into the analysis is the core underlying growth in the number of properties across the country. Twenty five years ago back in 1992 when REINZ started collecting and publishing real estate statistics there were just under 1.2 million properties across the country and in that year total sales amounted to 63,000. At the end of 2017 there were an estimated 1.63m properties, an increase of over 435,000 properties, up 36%, whilst total sales in the 2017 calendar year was 73,557, an increase of less than half that of the growth of number of properties. Property sales have gone through around 8 cycles in those 25 years reaching a all time high of 121,777 in April 2004 and an all time low of 53,463 in February 2009.

These highs and lows of the market have represented, a proportion of sales to actual dwellings with a high of 8.4% and a low of 3.5%. Across the past 25 years the average has been 5.7%. Over just the past 10 years the average has been around lower at 4.7% with the current level of the 12 months to March 2018 at 4.5%, certainly below the 10 year average and the longer term average. This further reinforces the view that the market is lower than would be expected.

Complementing the sales component of the market assessment, I am keen to examine the latest data of the clearance rate. This metric I introduced back in January when assessing the year-end data for 2017. It is the measure of sales as a % of listings applied to the latest 12 month moving total.

The picture for clearance rate which as I demonstrated back in January tends to track pretty consistently to median price movement over the years. Looking at the most recent 3 months the clearance rate appears to have arrested its decline and similarly the annual median price movement has stablised at around 5% allowing for the monthly volatility.

Taking all these data points into consideration it looks to me that we have reached the bottom of a cycle of property sales. Given the scale of the current residential dwellings at a level of 1.63m, a sales level of 70,000 is a low point and over a forthcoming period of what maybe 2 to 3 years we will likely see sales rise up again to an expected level of around 90,000. This assumption is predicated on the belief that a sufficient flow of new listings will come onto the market to facilitate this lift in sales, for without this, the latent demand will be unsatisfied and that has the potential to stall the market. 

 


So.. should I wait to list in the Spring?

by Alistair Helm in


4 Seasons trees iStock_000007235396XSmall.jpg

Sitting in a recent sales meeting of our local office the other day, the discussion came around to the pipeline of forthcoming listings. The one consistent comment emerging from around the table was the client desire to "wait for Spring". I have long heard this view that Spring is the best time to sell, but is it really?

Spring may well be the busiest time for new listings, but is such a cluttered and contested market the best time to grab and fight for attention?

This question and the data to support the opposite view is something I have written about in the past, but I thought it was about time to revisit this matter for the benefit of buyers, sellers and my new colleagues in this real estate industry.

From a statistical point of view the way to assess the seasonality of the property market is to create a picture of weighted average sales for each month, based on the historical sales by month. This is the approach I have taken in the past. However when updating my spreadsheet it did strike me that this approach was somewhat "rough & ready". After all, months have different number of days, especially when you allow for the major public holidays. So I factored this in to created a weighted average sales per day for each month and then expressed this in the chart below as to the variance that each month represents as compared to a "normal month".

This charts shows that the most active month of the year in terms of sales is March with January the least active. October is the month which could best be described as 'average'. The overall trend is that the most active sales period is February to May. The winter months through to September are quiet and then November comes storming back before December sees sales tail off. Nothing surprising in this I would have to say. As a note this data is total NZ sales from the full data set of Real Estate Institute statistics from 1992 to 2017.

In doing this statistical analysis, as very often happens I questioned the data to see if once you broke up the data for the full 25 years into separate 5 year periods, if this pattern has changed in any significant way?

This then is the same analysis but showing each of the five 5 year periods from 1992 to 2016.

This analysis I find very interesting (but maybe I am the only one!) - the key months for me are January, May, July and December as these to my mind are demonstrating a valid statistical trend.

January is very clearly becoming a much quieter month. In the most recent 5 year period (2012-216), a period in which sales have been buoyant, it has been close to 30% quieter than a typical average month. Why? Well it could be a factor of lifestyle and people really wanting to enjoy summer and not worry about buying or selling a property. However I believe the real estate industry has begun to see the need to manage their business better, and so establish campaigns that culminate with sales pre-Christmas or wait until the end of January and in so doing leave January clear for vacation. 

The month of May is very clearly becoming a more active month with a successive shift from being the 5th quietest month back in the early 90's to being the 3rd most active month of the year in most recent times. Why? I suspect that the earlier statement about how January has become less active has shifted the summer marketing campaign period well into May.

July has like May, become a more active month, however it is still the 3rd quietest month of the year.

Finally December has become less quiet, this coupled with a slight lessening of the activity in October would possibly indicate that the traditional Spring market activity is getting later and the lead up to Christmas is as active as the main month of November, especially as it lends itself a settlement and house move in the best of the summer days in the new year. 

 

Back to the matter of is Spring the best time to sell?

 

To really assess the best time to sell, you need to look at both the listings and sales by month to picture the seasonality. Statistics for listings only go back to 2007 via Realestate.co.nz and their NZ Property Report, so I have adapted the seasonality of sales chart to measure the past 11 years. So here are the charts based on this 11 year period for sales and listings.

These two charts have the same identical axis scale of -25% to +25% and the first thing that strikes you is how much more volatile listings are in terms of seasonality. There are only 5 months of the year when listings are more than average (Feb/Mar/Apr/Oct/Nov) with 7 below average, whereas sales are split 50/50. For sales there are only the two months of January and March when the variance to the average is greater than 10%, whereas for listings there are only 3 months when the variance is less than 10%.

A better way to view this mirroring of supply and demand is to line up the two sets of data on a single chart.

This is the chart that best shows the challenge of when to list a property for sale. If you hold by the adage of being a 'big fish in a small pond' then the best time to list is during the winter when listings drop off far more than sales drop off.

If you wanted to call a single month then December would be the winner. The differential between listings and sales is 16 percentage points, closely followed by May at 13 percentage points.

The worst month to list based on this analysis is October where the differential is 17 percentage points. This would therefore seem to completely quash the notion that the best time to sell is the Spring, certainly a deluge of new listings hit the market in the Spring but based on the latest 11 years of NZ sales data, September and October are actually quiet sals months with November being the single active month of the Spring.