Property is all about supply and demand

by Alistair Helm in


iStock_000005263521XSmall.jpg

Property as we all know is at its core, a fundamental of Maslow's Hierarchy of Needs, the primary need for shelter. Far more important than even safety and self-esteem and self-actualisation.

For this reason property exhibits the same fundaments of economics of supply and demand. When the supply of a good (in this case property) is limited, price go up as we have seen in Auckland as supply of property for sale has been constrained whilst demand has grown faster than supply and the access to finance has been relatively easy and cheap. These latter two components also impact the economics of property as does the substitution of property options between renting and buying.

If the cost of buying becomes affordable and the access to finance is available then people will buy, equally if it is cheaper to rent and finance becomes less accessible rental demand will grow and consequentially rents will increase. 

This is all logical. Let's now examine these principles when applied to the constant media story of 2013 - the dire housing shortage in Auckland. We hear weekly how Auckland needs 20,000 or maybe 30,000 new homes to be built almost immediately as well as 350,000 homes over the next 25 years to solve the housing crisis.

If the housing crisis is so dire and is the reason why property prices of houses for sale are growing at double digit levels, then why is it that rental prices of property in Auckland are not growing.   

This is very clearly seen in the chart below which tracks Auckland's stratified median house price over the past 4 years on an index basis with the red line; as compared to the index of mean rents based on bonds submitted to the Dept of Housing & Building with the grey line - the index is Jan 2009 = 100

Akl rent sale price Aug 13.png

 

The chart clearly shows that whilst property prices have increased by over 45% since the start of 2009 rents are up just 15% and the past 18 months have barely seen any change. 

If Auckland really had a housing crisis then rents would be increasing - it's the same economics of supply and demand. To look for proof, look at the same chart for Christchurch below. The fact is that Christchurch has a real housing crisis. There are too few available properties to meet demand as a consequence of the earthquake and the subsequent rebuild programme. In that market both rents and prices are rising, almost in alignment. 

Chc rent sale prices Aug 13.png

 

Now look at Wellington, a market that is not suffering a shortage of property and we see an alignment of rental price appreciation to property sale price appreciation. 

Wtn rent sale price Aug 13.png

 

This analysis would seem to support a view that the recent appreciation in property prices in Auckland have been fuelled by speculation.

With easy access to low cost finance over the past 2 years people have returned to property assets, this has been especially true of rental investment and property re-development. Investor growth has actually increased the supply of rental properties, which has as a consequence has maintained fairly stable rental prices at and contributed to a further tightening in the property-for-sale market through effectively taking home-owner stock out of the market. To this has been added inbound migration demand into the region from both domestic and international sources which has often been accompanied by higher equity capacity which has only further stoked the property price inflation.

 


Potential impact of policies to address the 'hot' property market

by Alistair Helm in , ,


Real estate agents might be urging the government to "be careful what you wish for" in regard to any government or fiscal intervention  in the NZ property market -  especially if they have read about their colleagues in Hong Kong!

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With further evidence that the NZ property market is building up a significant pressure bubble – the ever-present question is whether that bubble will see the pressure released slowly or just simply burst with negative repercussions. 

Measured on a 5 year basis the REINZ Stratified house price index shows a 17% increase, with over half of that gain in the past 12 months! This has prompted extensive calls for some form of non-monetarist intervention via the Reserve Bank to focus on LVR and also calls for controls on overseas buyers.

With this as a backdrop it is worthwhile to compare and contrast the NZ market with the Hong Kong market given its topicality. Accepting the Hong Kong market is a very different market; the choice is a result of the fact that the local government has recently introduced far-reaching controls to bring some reigning in of a super hot market that has seen property prices rise 120% since 2008.

These new measures coupled with the tightened of existing policies is an attempt to make property, especially apartments more affordable – now where have we heard that cry before?

However to begin with there is an important perspective that needs to be seen when comparing the Hong Kong market with the NZ market. We are so often told that NZ and again particularly Auckland has some of the most unaffordable property in the world when comparing house prices to salary. The NZ ratio has house prices close to 5 time the average salary – that pails into insignificance as Hong Kong sits at a whopping 12.6 times average income!

The measures brought in include a doubling of stamp duty to 8.5% for property over HK$2 million (NZ$330,000) . I was interested to read in the South China Morning Post article of what I would consider as the most appropriate measure, being the requirement for banks to assess the ability of borrowers to manage a three percentage point increase in mortgage rates, up from the prior test at two percentage points. Additionally a stamp duty has been introduced to curb speculation payable by sellers if properties are sold within 3 years – the duty is now between 10% and 20% of the selling price. Lastly the measures also include (which will be of interest to NZ) a 15% levy on non-local property buyers!

All in all some very stringent measures, which from the data published in the article shows the policies appear to be making an impact as property sales collapse.

  Estate
agents march in protest at moves to control sky high Hong Kong property prices  






  
  
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 Estate agents march in protest at moves to control sky high Hong Kong property prices

This collapse is having its effect on the industry of over 40,000 real estate agents in Hong Kong  which interestingly equate to 1 agent per 175 of population, compare that to NZ with 1 agent per 440 of population. These agents are up in arms as the slowing sales cuts their income – so much so that these agents association are marching on Government headquarters to have these policies reversed – could this end up being the case in NZ if proposed government and Reserve Bank measures cool the NZ market ending it backwards and jeapodising the income of 10,000 agents? – it will be interesting to see!

 


Auctions causing buyer frustrations – I blame technology!

by Alistair Helm in , ,


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As someone who has spent over 7 years advocating the adoption of technology by the real estate industry in NZ, I must now adjust my position and state that I believe that it is technology that is frustrating buyers in the stressed Auckland property market.

The stories have become so commonplace that I sense we feel like we have almost been with these buyers in some vicarious way at their endless frustrating auction.

The young couple with the necessary deposit and pre-approved mortgage eagerly awaits the auction of their chosen dream home. The research tells them that the property is within their means with a maximum budget of $475,000, the property has a CV of $410,000 and the agents tells them that at their budget they should certainly be bidding. However the bidding exceeds their budget with the property selling for $585,000.

So what’s going wrong and why blame technology?

 

Simply put the web is the first and only place people look for property. It’s logical, buyers love the ability to search around their chosen parameters of location, size and price. However the greatest attribute of the search process turns out to be its greatest downfall – the search range of price.

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Take this scenario of our hypothetical couple – they have a budget with a max of $475,000 so on Trade Me and Realestate.co.nz they search within their chosen suburbs with the range of $400,000 to $500,00. Website have price bands of $100,000 increments (Trade Me does have $50,00 increments up to $450,000). Their dream home came up in this search because the agent had included in the property details sent to Trade Me and Realestate.co.nz a 'Non-Display" search price of $500,000. The property was being marketed as an auction and therefore the agent did not want to display a price on the website, but it is mandatory for all listings on property websites to have a search price which is not published to power the search function.

It is my view that these wide price ranges are creating a false expectation amongst buyers and potentially misleading the public. To back up this view I have done some research to test my thinking.

I took a random sample of 10 properties on the market today, all marketed as auctions in Auckland City. These properties were in suburbs such as Onehunga, Mt Wellington, Mt Roskill, Blockhouse Bay and One Tree Hill. All properties were identified through the search price range of $500,000 to $600,000 being the average property price in Auckland today. I then went about undertaking a process to identify the exact search price or search price range for each property as inputted by the listing agent. To do this you need to use the Advanced Search feature on Realestate.co.nz which allows you to specify your own chosen price range in increments of a dollar; by doing this I was able to see at what price these properties appear or disappear from results. Also for reference and a sense of benchmarking (despite my dislike for CV’s) I got the Auckland City Capital Value for each property.

The results of this analysis were very interesting. Eight of the ten properties had a single search price inputted by the agent. The search price as compared to the current CV varied widely from 3% below the CV to 47% above the CV. The average was 23% above the CV.

 

Microsoft Excel-4.png

However the thing that was most interesting to me, and what could potentially be construed as misleading, was the way these property appeared in a wide range of search results based on price ranges. Remember all of these properties appeared in the search range $500,000 to $600,000.

Property #1 with a CV of $470,000 appeared in all 3 searches from $400,000 to $700,000 as the agent had specified a search range of $500,000 to $600,000.

Three properties (#4, #5, #7) with CV’s from $410,000 to $440,000 appeared in the range $400,000 to $500,000 – all had a search price by the agent of $500,000 so clearly the agent was indicating a sales price of over $500,000 yet if you had a budget of say $425,000 these 3 properties would appear to be within your range.

Property #6 with a CV of $620,000 appeared in the price range of $500,000 to $600,000 as the agent had chosen a search price of $600,000, yet clearly the expectation was a selling price of over $600,000.

It is clear that the current wide price range search parameters could be leading to misinterpretation by buyers. To fix it the websites concerned could offer more options with smaller price ranges, as noted Realestate.co.nz in their advanced search function does allow for individual discrete price ranges to be entered. However there is a simpler solution.

Real estate websites could make a slight adjustment to the underlying code of search results so that search increments become $99,999 instead of $100,000. This would mean that when a search is made in the range $400,000 to $500,000 it only returns property with search prices between $400,000 and $499,999, thereby ensuring that a property for which the agent has selected the search price of $500,000 will not be found in such a search. In that way technology could help home shoppers match expectation to realistic budget better.

 


We are not alone when it comes to property prices

by Alistair Helm in ,


Election night crowd, Wellington, 1931 -   Photographic Archive, Alexander Turnbull Library, National Library of NZ

Election night crowd, Wellington, 1931 - 

Photographic Archive, Alexander Turnbull Library, National Library of NZ

Have a read, if you will of this article which was published last Saturday, the 15th September regarding the trend in house prices over the past 5 years.

"House prices have become so dull that it is tempting to think they are no longer the mainstay topic of conversation at dinner parties.

Since 2009, the two major yardsticks of house prices – QV and the Real Estate Institute indices – have been broadly flat, rising in mid-single digits in 2009, then seeing either small falls or rises in 2010 and 2011.

The lack of direction in the market has surprised many, not least the real estate industry and the banks.

At the start of 2009, there were those who predicted a 15 per cent fall in prices.

The REINZ Stratified Price index ended the year six per cent up. While market predictions proved closer to the mark in 2010, in 2011 the commentators expected a fall of more than six per cent. The index rose by 3 per cent.

But many commentators still predict dire falls. Sceptics say prices remain above long-term trends for affordability. The average house price on REINZ 2011 numbers was 4.7 times the average salary, against a long-term average of four.

The flat market also disguises two trends. Stripping out inflation, house prices have fallen. And there has been a well-understood divergence between prices in Auckland and elsewhere.

So where next? Analysts foresee a flat market followed by slow growth. This still means falls in real terms, but it is a lot better for homeowners than the nightmare predictions.

Mortgage availability is improving, though slowly, with lenders offering higher multiples of salaries and higher percentages of buying prices.

Meanwhile, with rents rising significantly, buy-to-let opportunities have become more attractive, bringing other buyers into the market."

Now having read this piece, let me tell you firstly that I did not write it.

This article was published in the UK last Saturday - it was not an article about the NZ property market. (I have ammended the article by inserting NZ stats and references).

The fact is that the original UK article which I have pasted in full below for comparison, was written about the UK property market. What is so striking is the similarity - line by line, fact by fact the parallels are uncanny. The UK property market would from this comparison appear to have gone through a near identical rollercoaster ride as the NZ market over the past 5 years. To be clear the article above has been changed by me to include the references to data sources (with links) and to the actual NZstatistics.

Now here is the UK original article.....

TAKING STOCK: Slow growth coming but house prices are set for real-terms fall

By ALEX HAWKES

House prices have become so dull that it is tempting to think they are no longer the mainstay topic of conversation at dinner parties.

Since 2009, the two major yardsticks of house prices – the Halifax and Nationwide indices – have been broadly flat, rising in mid-single digits in 2009, then seeing either small falls or rises in 2010 and 2011.

The lack of direction in the market has surprised many, not least the City.

A report by niche broking firm Redburn this year highlighted the fact that the futures markets, set up to enable people to bet on the direction of house prices, had got things badly wrong.

At the start of 2009, futures traders predicted a 15 per cent fall in prices.

The Halifax index ended the year five per cent up. While market predictions proved closer to the mark in 2010, in 2011 the City expected a fall of more than six per cent. Halifax’s index fell just two per cent.

But many commentators still predict dire falls. Sceptics say prices remain above long-term trends for affordability. The average house price on Halifax’s 2011 numbers was 4.4 times the average salary, against a long-term average of four.

The flat market also disguises two trends. Stripping out inflation, house prices have fallen. And there has been a well-understood divergence between prices in the South East, particularly central London, and elsewhere.

So where next? The Redburn analysts foresee a flat market followed by slow growth. This still means falls in real terms, but it is a lot better for homeowners than the nightmare predictions.

Mortgage availability is improving, though slowly, with lenders offering higher multiples of salaries and higher percentages of buying prices.

Meanwhile, with rents rising significantly, buy-to-let opportunities have become more attractive, bringing other buyers into the market.