The Auckland Quarterly Property Review - Q2 2019

by Alistair Helm in


Quarterly Review logo.png

If you want to have a bit of fun at the next quiz night then ask someone what they think will be the likely median sales price in Auckland in July or August of this year as well as the likely number of sales? You don’t need to be a expert in such matters as the likely answer will be $850,000 in the case of the median sales price and for sales volumes look no further than the July and August sales figures from last year (1,777 and 1,837).

The fact is the Auckland property market is stuck in that ever repetitive syndrome known as Groundhog day. Whilst just last month I thought I could detect some signs of an upturn in the clearance rate as a lead indicator of market sentiment and activity levels, the hard frosts of winter seems to have killed of those spring buds, leaving us back waking up again on another Groundhog day!


VOLUME SALES

Total property sales in June across Auckland were 1,819. Last year the June sales were 1,879 and back in June 2017 they were 1,822. You get the picture, the Auckland property market is stagnant. Just for fun let’s remember the time back in June 2003 when in that same 30 day period we saw total sales of 3,441, that is 1,622 more sales than this past month. Back in 2003 we had no commentary of a housing shortage and the city’s population was around 1.2 million. Today it’s home to more than 1.6 million people. We are simply not transacting as often as 16 years ago. Investor activity has scaled back massively and the banks are way more circumspect about lending, even though interest rates are so low.

This stagnation of property sales can best be seen in this chart of the moving annual sales for the past 10 years.

Auckland moving annual total of property sales June 2019

The current level of sales over the past 12 months at 21,069 is down 38% as compared to the last peak of sales back in 2015. The stagnation began in December 2017 (18 months ago) when annual sales hit 21,854 and stopped falling. These past 18 months has seen sales hover at or around 21,000 with barely a movement although the past 9 months has seen some further weakening as that total looks to be heading below 21,000 sales per year.


PRICING

It will come as no surprise that just as sales volumes have stagnated over the past 18 months so have median sales price, although the stagnation has been going on now for over 3 years. It was in August 2016 that the median sales price across the Auckland region topped $854,000 and for the next 3 years prices have hovered around that level with never a clear, consistent and sustained trend to see a rise or a fall.

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Not since the GFC has the Auckland market sustained such a prolonged period of nil or negative price movement. In fact in April, May and June the median sales price has been identical to the same month last year - no price movement year-on-year for 3 consecutive months.


CLEARANCE RATE

This is the metric that I believe best highlights the emerging leading indicator as to the health of the property market. Last month I judged that we were seeing a brighter indication of future activity in the Auckland market as clearance rates were ticking up. It appears as ever that that forecast was premature as the past 3 months has seen that trend curtailed.

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The current clearance rate of 54% for June is not rising and after a false-start earlier in the year, it seems as though the strength in the market is not sustainable, and it is unlikely we will see much change as we head into the second half of the year. As can be seen from the 11 years of this data set, clearance rate is not a seasonal factor in the market it is the underlying metric that looks to examine the proportion of new listings-to-sales ratio as a true measure of supply and demand balance in the market.


Just how different is the Auckland property market to other major cities?

by Alistair Helm in


Auckland .jpg

The past week, the news wires have been a buzz over the Bloomberg assessment that New Zealand was identified along with Canada as among “most vulnerable economies to a correction in house prices” based on measures of house prices to rents, income, real house prices and household debt. The unanimous view of the NZ journalists have been that this pronouncement is nothing new (we have heard it before) and it is not likely to happen.

Such articles always seem to pique my interest to wonder as to how unique our property market really is? and how much we are out of step with other countries. This thought was precipitated when I saw this chart on Twitter tracking London house prices.

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It got me thinking how very different are the circumstances effecting the London property market as compared to the Auckland property market. For one thing the UK is seriously mired in the Brexit malaise, with all the uncertainty and economic dampening that has caused. Add to that London’s top end property market over the past decade has been fuelled by a significant number of overseas buyers squirrelling away millions if not tens of millions of pounds in properties that they then don’t live in; prompting calls for a vacant property tax.

How different then, the Auckland market where immigration has been the major driver as well as ever present investor activity added to which has been the continuing shortage of new properties under construction to support a city growing by around 120 new residents every day.

This is not to say that there aren’t commonalities between these two major cities, both of which are the epicentre of the respective countries and thereby tend to attract talent and drive demand. Both economies over the past decade have enjoyed low mortgage interest rates - the UK sub 2% for 2 to 5 year fixed; New Zealand more like 4% to 5%.

So set against this background the question I was intrigued to investigate was, how similar would these two markets, separated by 18,000kms be in terms of trends in property prices.


The data source

The above chart of London prices is sourced from the House Price Index from the UK Office of National Statistics - this data is provided in an excellent open data format and used the stratified methodology of property price reporting which best manages the issues inherent in property sales stats borne of compositional volatility over time. For NZ we are fortunate to have mirrored data provided by the Real Estate Institute in the House Price Index which was developed with the Reserve Bank and is the best data source for true price movement analysis. One advantage we enjoy in NZ is the timeliness of data a full month ahead of the UK data.


The analysis

The mapping of these two comparable data sets representing the house price index for both Auckland and London covering the period from January 2005 to date produces this revealing chart when tracked on a split axis.

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The clear conclusion I draw from this chart is that whilst these two markets may be so very different in so many ways, the hard truth is that the trend in property prices in these two markets over the past 15 years are clearly aligned. The Auckland market has appreciated at a faster rate than London (a 15 year rise of 134% as against 98% for London), but the tracking of the key events of the period are very clearly aligned.

Looking in more depth at some of the key periods of the past 15 years; the following 3 charts help to reinforce this alignment.


Global Financial Crisis

The impact of the GFC was clearly felt in both major cities with London property prices falling 17% through the 18 months surrounding the crisis before prices stabilised. Auckland faired slightly better only falling 11% over the period.

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Post GFC recovery

As the two major cities began to recover after the GFC so began a period of property prices that over the course of the ensuing 7 years saw a trough-to-peak of 86% in London property prices, with Auckland more than doubling over the same period to show a 121% rise.

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The most recent 3 years

The two markets both slowed in mid 2016 and since then have seen stagnant property prices, London slipping by 2% based on the latest data for May 2019 whilst Auckland is showing a 1% fall.

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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.


The Auckland Quarterly Property Review - Q1 2019

by Alistair Helm in


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The Auckland property market is exhibiting the classic symptoms of a market uncertain as to its future direction.

The latest 3 months to March, point to a flat market with no perceptible rise in sales activity, with prices edging down. However I believe there is cause to believe that signs of a recovery in the property market may be emerging. The lead-indicator of the clearance rate points to this possible improvement as this year progresses.

Examining the three key data points of sales volume, sales price and clearance rate in more detail should help to explain this summation.


VOLUME SALES

In the first 3 months of 2019 there were a total of just over 5,000 property sales across the Auckland region, this compares to just over 6,000 for the same period last year, as has been the story for the past 2 years as property sales have slowed. What is more significant is the fact that in relative terms the total sales in Auckland in the past year is actually half the actual sales volumes of the mid 90’s and the mid 2000’s. Let me repeat that statistic. Half the sales volumes. The ‘relative terms’ to which I refer is sales per head of population.

In 1996 the population in Auckland was just breaking through the the one million mark, by 2004 it was growing by over 2,000 a month as it reached 1,240,000. Today with that growth rate accelerating, the population of the country’s biggest city stands at 1,657,000.

Back in 1996, the annual sales of property stood at 31,927, this equated to 32 property sales per 1,000 population. By 2004 sales for the 12 months to March of that year was a staggering 40,170, equating to 32.2 property sales per 1,000 population. Now compare that with the latest 12 months to March of this year. With sales of just 24,301 it represents just 14.5 property sales per 1,000 population. Half the relative sales per head of population than those two other periods. This really puts todays Auckland property market into context compared to prior periods.

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In relative terms less transactions in Auckland today than at anytime since the darkest days of the GFC - the result of what?

Certainly market price is a key factor, back in 1996 median sales price was $230,000 and by in 2004 it was $320,000 whereas today it is $850,000. Certainly the appetite from investors has diminished from what would have been the hay-days of 1996 and 2004; and certainly access to funds from banks is far tighter today than in those prior periods, although perversely the interest rates on mortgages has never been lower.

There is simply no getting away from it, property sales in Auckland are not breaking any records any time soon. As the chart shows the variance in monthly sales vs prior year has been consistently negative since November 2015, with the brief exception of the early months of 2017 - all of those comparative gains are now being reversed.

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PRICING

As sales volumes remain flat, so do the sales price. The latest month of March saw a median sale price for Auckland of $850,000. This is $2,000 down on March last year and $30,000 down on March 2017, but is $15,000 up on March 3 years ago - property sales prices in Auckland are flat and losing value to what is benign inflation.

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CLEARANCE RATE

With neither sales volumes nor sale prices showing anything of positive outlook, it’s left to what I judge is a key lead-indicator of the market to point to the future, and the rest of 2019 and into next year. The clearance rate, that being the sales volumes as a percentage of new listings tracked on a 12 month moving basis which is now showing a consistent and healthy increase.

If the clearance rate is edging up then a greater percentage of properties brought onto the market are selling and as the historic chart below shows there is a correlation between clearance rate of sale price. A natural and predictable correlation. If properties are selling faster than the rate of new listings and inventory of new listings is declining, so it speaks to greater demand from buyers which in turn feeds into price inflation; although the lag can be many months.

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The clearance rate in Auckland in the past few months has edged towards 60% which is certainly a healthier rate than this time last year when the rate was bumping around the bottom of the cycle at 53%, certainly a long way from the frothy market levels of 2015 at over 75%, but much healthier than the GFC days of 2008 at just 33%.

As ever property cycles are notoriously hard to predict and are really best viewed through the rear view mirror. Later this year it will be clearer as to whether there has been a recovery beginning or simply another erratic bouncing around with no clear cyclical upturn on the horizon.


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.”


Is Auckland likely to follow Sydney & Melbourne with falling house prices?

by Alistair Helm in


Photo courtesy of  Catarina Sousa

Photo courtesy of Catarina Sousa

Much has been written over recent weeks as to the question “will Auckland house prices fall in coming months, mirroring what has been seen across the ditch in the leading Australian cities?”.

I had firsthand experienced of just this question recently when a Sydney based buyer interested in an Auckland property was fearful of making an offer, uncertain as to the future trend of Auckland house prices.

Such concern and uncertainty in my opinion, needs hard data to either support the supposition or to refute it, and thereby allay fears. Recent commentary in the median has put falls in Sydney and Melbourne anywhere from the current 9.5% fall from peak in Sydney and 5.8% in Melbourne to the potential of a 20% fall according to an ANZ economist.

Whilst these data points are useful (and depending on your perspective potentially alarming); for me the visualisation of pricing trends assists better in comprehending where we have come from, and where we may be heading in regard to house prices. With this as a perspective I was delighted to come across some very interesting analysis published on Domain, one of the two leading real estate portals in Australia.

The article titled When was the best buying in Australia’s capital cities undertook a very interesting analysis to visually portray the slump in house prices in leading cities. The research analysts calculated “how much money would have be made from selling the median value house in each city in December 2018, based on when it was purchased over the prior 15 years.

Historic values were adjusted for inflation so both the buying and selling points are represented in today’s dollars. Therefore, the gains and losses reflect ‘real’ returns, taking into account the effect of inflation”. It is worth highlighting that the data set is house sales and excludes apartments and units.

The resultant charts certainly visually portray the slump .. and some degree of a recovery.

Net gain in house prices in Sydney based on Dec 2018 prices

Just to ensure complete clarity in the interpretation of the chart. The data visualisation shows in each bar the notional net capital gain for a house sold in December 2018 which in theory had been bought in relevant quarter, anytime in the preceding 15 years. So to take a specific data point as an example, a house bought in the period Sep 2008 would have appreciated A$400,000 if sold in December 2018 based on median sale price adjusted for inflation, whereas a property purchased in May 2015 would have sold with a loss of A$6,000.

The chart for Melbourne is presented below to provide a side by side comparison with Sydney based on the same model.

Melbourne notional capital gain in house prices to Dec 2018 Properazzi

Comparing these two charts highlights some interesting differences and similarities. In regard to the loss in capital value over the recent 2 years, Sydney has suffered a significantly larger drop almost touching A$200,000 capital loss (if property was purchased in May 2017) whereas Melbourne only edged towards a A$100,000 capital loss in Jan 2018. However the data clearly shows that both markets are recovering and given these are quarterly data sets this trend covers 9 months in the case of Melbourne and 15 months in the case of Sydney, so it would be fair to say this is a trend.

Also of interest is the key difference between the two markets, especially in the period from 2004 and 2012. Sydney almost consistently delivered c. A$300,000 gain, whereas Melbourne showed significant capital gain through the first 3 years at upwards of A$350,000 but since then has edged lower in two clear cycles.



AUCKLAND

So naturally the question is how does the Auckland market look in comparison, and does it show signs of mirroring Sydney and Melbourne?

I have used REINZ stats to extract the same data set - quarterly median house sale price for Auckland from 2004 to end 2018. I have adjusted the data for inflation by using the consumer price index provided by the Reserve Bank of NZ and have mapped the data in the chart below.

Auckland capital gain as at Dec 2018 for house sales Properazzi

There is certainly a similarity between Auckland and the Australian cities. There are though significant differences. Firstly the decline in capital growth in Auckland occurred earlier - starting in March 2012 when capital gain was around NZ$350,000 through to May 2016 when capital gains disappeared. Whereas Sydney began to see falling capital growth a year later in March 2013, but fell sharper to hit nil growth a year earlier than Auckland in June 2015. Melbourne on the other hand began to see falling capital growth in September 2102 and hit nil growth in December 2016, just after Auckland and a full 18 months after Sydney.

The major difference though is that whereas Sydney has dropped to show a bottom-of-the-market based on median sale price in June 2017, representing a fall of A$172,000 as compared to December 2018; Auckland has a bottom-of-the-market in December 2016 representing a fall of $62,000.

So the Auckland market began to see the heat come out its property market earlier, it saw prices drop earlier and that drop has been for longe, but did not slide so far down as Sydney. Add to this, the fact that the Auckland market has recovered to show positive capital gain for the past two quarters.

There is never any real certainty in predicting the trend in property markets, but based on this data analysis I would judge that the Auckland market does not look likely to mirror the Sydney and Melbourne markets; simply because Auckland saw an earlier correction. If anything it could be argued from this data visualisation that the Sydney and Melbourne markets are in some way mirroring Auckland.

The final chart shows the side by side comparison for all 3 cities based on NZ$ data and supports this assesment.

Auckland Sydney Melbourne house price capital appreciation as at Dec 2018 Properazzi

THE AUCKLAND QUARTERLY PROPERTY REVIEW - Q4 2018

by Alistair Helm in


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The Auckland market continues to mark time, showing little in the way of a clear direction. It is as if the market were an indecisive person caught at the fork in the road.

“Do I show signs of heightened activity and enjoy sales volume growth and price appreciation, or do I see retrenchment with lacklustre or declining sales and with it a weakening of sales prices?”

Neither future path is yet to be definitively taken. However analysing the core metrics of the market as I love to do, helps to identify the future direction of the market. These metrics are the sales volume trend, the median sales price trend and the clearance rate.


VOLUME SALES

The final quarter of 2018 saw one of the most erratic changes in sales volume for many years. As a total, sales for the months of October, November and December totalled 5,417 properties. This was a 3% rise as compared with the same quarter of last year and totally reflective of the normal market we have seen over the past year as the market has continued somewhat flat. However within that 3 month period the sales as compared to prior year were all over the place.

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October sales were up 19%, November up 12% and the December collapsed with a 21% fall. Yet in total for the quarter - a 3% rise. Why?

I believe what we witnessed was entirely the result of the deadline for the introduction of the changes to the law restricting overseas buyers which came into force on the 22nd October. The fact is any property purchase under contract (be it a conditional or unconditional contract) made legal before this deadline was except from the changes and I firmly believe what we witnessed was a surge in buying activity that brought forward property purchases to meet the deadline. These sales show up in both October and November due to the extent of conditional agreements going unconditional in November and recorded in that month’s stats, as well as unconditional sales in October.

This short term hiccup though does not materially impact the underlying trend in sales volumes as is seen in the moving annual chart below. Sales volumes for property sales across Auckland remain flat. The latest total for the calendar year 2018 was 21,850 down 35% from the most recent peak of the market back in October 2015.

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PRICING

Just as sales volumes have remained flat for close on 15 months, so the median sale price have continued to simply mark time. The median sale price for the final month of the year was $862,000. A year ago it was $860,000. Two years ago it was $855,000. You have to reach back into 2015 and early 2016 to witness the last time median sale prices in Auckland was seen rising significantly. Interestingly way back in August 2016 the median sale price was $854,000, that is 27 months ago, such has been the flattening of Auckland sale prices.

Auckland median sale price trend 2000 to 2018.png

When seen as year-on-year variance it becomes ever clearer as to the fact that Auckland median sales price has experienced an unprecedented period of stagnation. This though as many people will likely comment is not a bad thing. Stability of house sale prices drives over time greater confidence in the market. Initially from buyers who feel less panicked into the fear of ‘missing the market’ as it rises; and then subsequently from sellers who feel more confident as to what the market value of their property is and therefore more confident to move.

Auckland median sale price variance 200 to 2018.png

CLEARANCE RATE

The final of the 3 core metrics which I like to look to to get a rounded and truly objective view of the state of the market is the clearance rate. The measure of the transactional ‘health of the market’. It uses the comparison of sales to new listings ratio as a measure of overall activity in the market.

For the past 3 months, the final quarter of 2018 the clearance rate has bounced back. The last quarterly report for 2018 Q3 highlighted a noticeable and sudden weakening in the market. Halting a trend that looked to be showing all the characteristic signs of recovery. Well, the last 3 months of 2018 seem to have put that weakness out of its mind, and set the trend back on the predictable path which is towards a strengthening in the market.

Auckland property clearance rate 2008 to 2018.png

The current clearance rate is edging back towards 60% . Still a far cry from the 70+% levels seen back in around 2015 but as ever with property markets there is typically a cyclical movement. The current projection is surely heading towards an upward trend in the clearance rate which then tends to be the lead indicator that (as shown by the historical context in the chart above tracking the past 10 years) may well see a resulting inflationary impact on prices.


The Auckland Quarterly Property Review - Q3 2018

by Alistair Helm in


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The Auckland market is in the midst of one of its most interesting phases witnessed in the past couple of decades. Typically we see Auckland experience a see-saw market - alternating between a booming market or a retreating market.

For fully the past 11 months, the market, coming off a steady 2 year decline in sales has stubbornly, resolutely and somewhat belligerently refused to succumb to further decline; however and this is the unusual part, the market has not in anyway shown any signs of a resurgence, yet.


VOLUME SALES

Analysing sales volumes is critical in understanding the market and more importantly in identifying the future direction of the market. Simply put, rising sales tend to foretell a future rise in prices and equally the converse is true - this is somewhat simplistic but helpful as a rule of thumb.

So what to make of the market we have experienced since this time last year. A year ago the 12 month total of sales for Auckland stood at 22,781, it was the 23rd consecutive month in which sales volumes on a 12 month rolling basis had fallen. From a peak in October 2015 when the total was 34,060, volumes had fallen by 33%. However for the past 11 months sales volumes as seen on a 12 month rolling basis have not changed. Not changed; as in remained within a range of just less than 1,000. Here are the raw numbers and you can see how flat the sales have been.

October 2017: 22,278

November 2017: 21,788

December 2017: 21,608

January 2018: 21,614

February 2018: 21,619

March 2018: 21,350

April 2018: 21,435

May 2018: 21,554

June 2018: 21,561

July 2018: 21,661

August 2018: 21,645

September 2018: 21,615

This is an astonishing series of numbers - the mean variance from the median of 21,614 is just 34, representing 0.2%.

This unusual plateau in sales volumes is clearly seen in the chart below which shows the past 10 years, with the inset view of the full data since 1993. Simply put there has not been in the past 25 years a period when such a prolonged plateau has occurred.

Such an unusual trend calls for an explanation. Here are my thoughts around why, and also what may be the future trend.

The period from the peak in 2005 until November of last year was the classic end of ‘the Golden Summer’ - prices had reached a level that was becoming unsustainable and coupled with tighter lending restrictions, investors particularly, parred back activity in the market as yields became unsustainably low given the likelihood of low capital growth.

There can also be no ignoring the fact that the period of the past 11 months paralleled the duration of the new government, although I would judge this more correlation than causation. However the new government has placed housing atop the agenda, added to which the publicity of KiwiBuild has potentially enthused may first home buyers, but at the same time frustrated others as it clearly demonstrated just how long it takes to activate the supply side of the market.

Ignoring the political influence, the most likely explanation is that a plateau in sales volumes is the outcome of strongly opposing forces - cheaper finance, matched to limited supply of properties coming onto the market, added to which the tail end of strong price appreciation and a strong economy, all key factors continuing to drive demand. Facing off against this is tighter lending criteria in terms of LVR but also tighter debt servicing requirements from lenders, added to which have been growing fears of global economic uncertainty and that same consistent issue of limited supply of properties coming onto the market, in this instance working against the market.

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PRICING

So whilst sales volumes have plateaued, what has been the resultant movement in median price? It would come as no surprise to see that median prices have also plateaued. Proving the premise that rising volumes foretell rising prices as does the opposite. Equally a ‘standoff’ in sales trends to lead to a ‘standoff’ in price movement. Over 2 years ago Auckland median sales price topped $850,000 and since then prices have barely moved. For 6 of the past 9 months year-on-year variances have been down, albeit by no more than 2%.

The one variable that has not been analysed in the foregoing charts is new listings. Adding this into the mix provides what I consider the most robust lead indicator of the property market, that being clearance rate.


CLEARANCE RATE

In the last quarterly report published in August, with the data including July, I was confidently foretelling of a developing upswing in clearance rate and judging that the comments made at the time by the Reserve Bank Governor, that prices may be as likely to rise as to fall could be accurate on the upside. Well a further few months of data are now showing that prices may in fact be more likely to fall in Auckland as to rise. For the much heralded recovery in clearance rate has had a significant set back as shown in the chart below.

The fact of the market is that a stagnant level of sales is facing off against rising level of new listings which have lead to a drop off in the clearance rate which is significant and a setback to the heralded recovery. The rise in inventory is not to be unexpected at this time of year, however, remember this clearance rate is based on 12 months of moving total data of both new listings and sales and therefore excludes seasonal influence and more accurately therefore reflects true underlying market trends.

It therefore looks more likely that the Auckland property market is going to continue to face strong head winds in the coming months with a potential slide in prices as a buyers-market takes hold and sellers learn to adjust expectation in order to win that sale and in so doing allow themselves to become tough negotiators with their buyer-hat on.


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%.


The Auckland Quarterly Property Review - Q2 2018

by Alistair Helm in


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A bit later than planned here is the quarterly report. I've included the latest July property data to produce this analysis of the Auckland property market. As I have commented recently I've made a conscious decision to cease to produce data analysis on what is seen as the "NZ Property Market". The fact is this aggregation for all NZ property data is no longer as relevant, given how distinct the property market is between Auckland the rest of the country. That is why I will produce a quarterly report on Auckland and another one on New Zealand outside of Auckland.

The picture of the Auckland property market now with the benefit of a further 4 months data since the last report is showing a market in the doldrums. A situation that is actually quite uncommon from a historical perspective as compared to the rollercoaster that typifies the Auckland market.


Volume Sales

From a volume sales perspective - annualised volumes have remained at the level of 21,500 for virtually all of the past 9 months with just the vaguest sense of an increase in the past 2 months. Remember this is annualised sales so there is no seasonal factor to explain any movement. This level of sales remains at levels reminiscent of the post GFC period of a decade ago, far from the peak activity of 3 years ago. The decline since that time is significant 37% less sales. 

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When seen as annual variances in monthly sales the same visualisation of the market in the doldrums is reinforced. The typical cycles of the Auckland property market usually see a seesaw rise and fall, whereas the recent period has the appearance of a market just marking time; deciding if the next move will be up or down, almost mirroring the recent proclamation of the Reserve Bank Governor.

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Pricing

In terms of pricing the median sales price over the the past quarter has similarly marked time at the $850,000 level, although July saw this slip down to $835,000. It is now fully 18 months since the Auckland market topped out at $905,000 - subsequent months have seen prices bump around between a low of $820,000 and a high of $880,000. The chart below tracks the year-on-year variance of median sale prices over the past two decades.

Auckland median price movements 2000 to 2018

Clearance Rate

I am very keen on this relatively new metric of the clearance rate as a tracking tool for the trends in the market. It is measured as the rate of sales against the rate of new listings - think of it as the available stock in a warehouse - if your clearance rate is below 50% then you will suffer the pressure of overstock and will need to adjust prices down to clear inventory. The opposite with a clearance rate of over 50% indicates strong demand which can trigger price inflation.

As you will see from the chart below the clearance rate for Auckland is edging up, as it has been for most of this year so far. The point about clearance rate is that it is all about relative market activity so whilst sales are almost static this is matched to very low new listings, within this market behaviour the property being listed is being sold at an ever increasing rate and as the chart shows clearance rate tracks to a pretty close correlation to price inflation. 

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So just maybe the Reserve Bank Governor was righter than he thought when he stated that there was as much chance that property prices would rise as they would fall!

 


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?