Just how unique is the NZ Property Market?

by Alistair Helm in ,


We are all too accustomed to articles stating that NZ house prices are “amongst the highest in the world” / “over-valued as compared to rents” / “driven up by tax advantages” / “being inflated by overseas buyers

I read these articles and accept the often highly respected authors for their bullet-proof assertions. Clearly we must be unique in the world and standing by as we witness house prices spiral out of control as according to a recent Gareth Morgan article in the NZ HeraldNew Zealand is unusual in the world in that it pretends housing isn't an asset like bank deposits or company shares”. Again I respect Gareth Morgan as a credible economist and a broad thinker, I may not always agree but I do respect his views.

So set against this backdrop of opinions and analysis I decided to seek out some data to compare NZ with other countries. The natural partner for comparison are the markets of Australia and the UK. I am grateful to the assistance of an excellent UK property commentator who helpfully pointed me in the right direction for UK data, thanks Henry Pryor.

The UK data provides a mix adjusted house price index which mirrors the REINZ Stratified House Price Index and fortunately the data extends back into the 1970’s whilst REINZ data goes back to 1992. Using the index of the 1st quarter of 1992 as the base the two markets track through the next 22 years in what is a surprisingly aligned growth path matching each other for the 22 year rise of 280% to both reach the index level of 383 in the 1st quarter of 2014.

It is worth remembering that the UK has capital gains tax, inheritance tax as well as stamp duty - none of which seem to have either depressed that market nor preferenced the NZ market by comparison. 

If we add in Australian data which provides a valuable benchmark of a similar country albeit of greater scale closer to our trading partners of Asia and the US. Australian data is not accessible back 20 years but a comparable Property Price Index is available from 2002. Given the property bubble that all markets experienced in the mid 2000’s I decided to approach a comparable index for the three countries not on an aligned time period but rather indexed on the starting point being the peak of their respective property price index before the property crash caused by the GFC in 2008/9. For NZ property prices peaked in the 3rd quarter of 2007, the UK peaked in the final quarter of 2007 with Australia in the 1st quarter of 2008.

What transpired next is ably demonstrated in the chart below which shows the shallow fall experienced in Australia before a very strong recovery at a time when the UK and NZ markets continued to weaken. The UK market suffered the worst seeing the index fall 18% before rising whilst NZ fell 10%. 

It took Australia just 5 quarters for prices to recover from the peak of the pre-GFC collapse compared to 4 years for the UK and close to 5 years for NZ. Subsequently all 3 markets have experienced resurgent price inflation that now sees the Australian market 26% up on the prior peak of 2008 as compared to 16% and 18% rises for the UK and NZ respectively.

Such clear alignment of pricing trends despite the very different tax policies designed to milk the property market or stimulate the property market would seem to point to the view from the analysis that the NZ property market is not that unique, if anything it is incredibly similar to these other markets and despite the best intentions of politicians the market would seem to move aligned to factors well outside of such policies.


In a heated property market do sellers’ price expectations become inflated?

by Alistair Helm in


It is a commonly held view that people looking to sell their home and agents that act on their behalf, have a sale price expectation way ahead of the reality of what buyers will actually pay. It is logical. Why would a seller not pitch a price at least a bit above what they would expect to get. Additionally in a heated market one would expect these expectations on the part of sellers to become further inflated to the point of outright greed - Right?

Well it seems that in general across NZ, sellers seem to be demonstrating restraint and setting a price expectation that is actually moving close to the selling price - or seen from the other perspective buyers appear to be paying closer attention to the price expectations of sellers!

Is sanity creeping into the property market?

Here are the facts based on the last 7 years - a period that started as the property bubble peaked in 2007 and has taken us through a property crash and a property resurgence.

Over the past 7 years the median asking price as analysed by all new listing added to Realestate.co.nz has risen from $400,000 in January 2007 to $495,000 in March 2014; whilst the median sales price as reported by REINZ has risen from $327,000 to $440,000 last month.

As would be expected the asking price has remained ahead of the selling price, but that margin has actually decreased over the past 7 years from a premium of around 205 to 25% to nowadays around 15%.

UPDATE: I have at the request of a commenter added this modified chart of the variance of asking price to sales price using 12 month moving average data thereby removing any seasonality.

This trend is very clearly seen when the data of asking price and selling price is tracked on an index basis where the January 2007 data is set at 100. Here the rise in the median sales price can be seen growing faster than asking price over the past 7 years.

Asking price in the last 7 years has risen by 23% as comparing March 2014 with January 2007 whereas sales prices have risen by 35%.

 

Possible Explanations

So why would it be that asking prices has not kept pace with selling prices? - here are couple of explanations that I would put forward:

It's a sellers' market and buyers have to be price-takers if they want a property

The most recent 3 year period at least has seen a very strong sellers' market where inventory levels have been historically low coupled with low finance costs and ready access to lending, this has created the most recent property inflation spike which has set the media alight with expectations of a bubble. Such media coverage tends to invoke the 'herd mentality' which creates an environment where buyers loose negotiation leverage as the power switched to sellers - buyers then have to accept that they need to pay to secure a property they want or fear loosing it.

Agents are taking more care in appraising properties as a consequence of new legislation

The most recent changes to the Real Estate Agents Act came into force in 2009 and one of the requirements of the Act was to require all agents when undertaking an appraisal and before a signed License Agreement is completed, to provide the vendor with a written appraisal document which must include an indication of expected appraisal price for the property. This price is then often used as the listing price for website search range - the 'hidden' price which drives the search engine of the website without a specific price being published. This requirement of the Act is likely to have driven a behaviour amongst agents to be more accurate (and thereby less inflated) in estimating a sale price.

Agents are becoming more conscious of the role of the web and pitching prices to suits searching

In someways as a follow on from the last explanation, the last 7 years has certainly seen a significant change within the real estate industry in the appreciation of the role of the web in property searching and discovery. As this transformation has occurred agents have come to realise the importance of the price ranges and this may well have lead to asking prices entered as search prices being set to optimise the exposure of a property when people are searching. Whilst this alone may not have caused this narrowing of the gap between asking price and sales price, in the early period of the last 7 years the likelihood was that most agents delegated the task to office admins who may have been given a range of price search and taken upon themselves to enter the range of a specific figure.

Reliance on industry automated appraisal systems for that are powered by less timely sales data 

Most agents use one of the automated appraisal tools offered by Terralink with Property Guru or Property IQ offered by Core Logic - both of these are themselves powered by the database of settled sales from the LINZ database. This database is on average at least 3 months older in terms of data than the REINZ sales data which could cause a lag effect therefore depressing the potential price inflation factor evident in the market.

In my view it is likely that all of the above could be contributing to some degree to this trend of a convergence of asking price and selling price. I certainly don't expect them to converge however they are both key indicators of the property market with the measure of asking price being correlated to property sales as I analysed a couple of months ago in relation to the Auckland market.