Benchmarking the NZ & UK Property markets

I am a keen observer of property markets outside of New Zealand. The UK and the Australian markets provide what I judge the best benchmarking, as a guide for better appreciating global trends in real estate and property markets. The UK market especially provides a rich set of data on all aspects of these trends and that it is why it is often valuable to undertake some regular benchmarking.

The UK market certainly suffered a more severe correction at the hands of the Global Financial Crisis than NZ in terms of property prices, however through a combination of rebounding economic confidence, a raft of government initiatives coupled with strong international buyer interest in London, the UK property market has seen a strong growth in the past year.

The past year has also been a period of strong growth in the NZ market where annual sales topped 80,119 for the 2013 year. This is a 43% increase on the lowest year of the past 20 years which was 2008 when just 56,071 properties were sold; however pre the financial and property collapse driven by the Global Financial Crisis, NZ saw consistent years through 2002 to 2007 when sales exceeded 100,000 per annum.

The UK property market by contrast has just seen over 1 million sales in 2013 an improvement from their low ebb in 2008 of just under 850,000; however like NZ their prior peak years topped 1.6 million sales per annum. To more accurately benchmark the two markets I have scaled these sales to the relative population thereby creating this chart showing the number of sales per 1,000 population.

It can be seem there is a correlation between the two countries when it comes to house sales, certainly the UK had a considerably higher rate of annual sales pre the GFC. Both countries then saw significant falls and both have rebounded with the NZ rate of sales now ahead of the UK, likely a function of an early economic recovery.

The UK just like NZ was cited in the recent Demographia survey as having a high levels of unaffordability especially in the main cities including London which was close to the ratio of Auckland as the 10th most unaffordable city of those surveyed in the report (Auckland was the 7th most unaffordable).

Continuing this benchmarking between the two markets, the next logical comparison is house prices. I have sourced the comparable data from the Stratified Median House Price provided by the Real Estate Institute for NZ data and the Office of National Statistics for the UK using their Mix Adjusted data which is a direct match to the methodology of the Stratified Price.

The chart provides an interesting evaluation of the relative pricing of housing in the two countries, both are national medians and both cover a wide spectrum of properties.

The price fall following the property crash in 2008 was 11% in NZ and 15% in the UK. From the respective pre-crash peak pricing to the current prices the UK is up 12% whilst NZ is up 14%. Naturally the rise from the bottom of the market in 2009 is more significant, the UK up 33% and NZ up 29%.

Finally drilling down to the key regions within both markets I have looked at the performance of the past 12 months in house price appreciation. For the UK the rise has been consistent across all major regions although the scale of the rise has been more spectacular in London which has shown an 11.6% increase in prices, a region that now has a median house price of £383,000 (NZ$766,000) and an expectation of that rising to £500,000 (NZ$1m) by the end of the decade.

In the local market the past year has seen some volatility in house prices across the country using the REINZ Stratified and median house prices for the period up to November - this period chosen to match the UK data. Whilst the national rise has been just under 10% the range has gone from a 6% fall in Otago to a 16% rise in Taranaki with Auckland delivering just under 15% price rise.

Barfoot & Thompson post a record year of sales for 2013

The largest real estate company in Auckland, Barfoot & Thompson published their most recent sales report for the last month of December capping off what has been a stellar year for the company.

Whilst December witnessed a slowing of sales with just 817 properties sold down from the 920 sold in the December last year the company accounted for sales of 13,123 properties in the past 12 months a growth of 12% amounting to an extra 1,413 sales compared to 2012. Set against a total of 31,782 properties sold in Auckland in the past year this gives Barfoot & Thompson a market share of 41% - 2 of every 5 homes sold in Auckland was sold by them in the past year.

The key statistic though is the shear scale of transaction value - $8.5 billion of property sales undertaken by the company, an increase of 24% on the prior year. The company currently is selling  properties at the rate of over 6 properties every hour of the working week and billing services at the rate of around $100,000 every hour of the working week.

The company has benefited from the significant resurgence of the property market in Auckland selling more than twice as many properties in 2013 than in 2008 at the depth of the property collapse. in dollar terms the value of sales have risen faster especially over the past 3 years with value of sales up 68% in just 2 years.

The stellar rise in sales volumes though does show signs of slowing as analysis of the past few months shows. On a seasonally adjusted basis December sales were down 6% following a 12% seasonally adjusted sales volume fall in November. As cited last month part of the reason for the fall could well be put down to the impact on the first time buyer segment as a result of the Reserve Bank restrictions on high LVR lending.

The latest analysis of the sales volume by price segment of Barfoot & Thompson sales data shows that this bottom segment - sub $400k which is very much a target market for first time buyers remains a declining proportion of Barfoot &Thompson’s portfolio of sales. In November it represented 17% - a month later it had fallen to 16%. A year ago this segment accounted for nearly 1 in 4 of all sales, such has been the slide in activity in this segment of the market.

This movement between price segments has been a trend witnessed across all property sales over the past 4 years as the market demands of property in the Auckland region have accelerated prices and fuelled higher priced segments. 

In the past year alone Barfoot & Thompson has sold over 1,500 properties at a price of over $1,000,000 , this compares to 500 just 3 years ago and in the $2,000,000 and above segment sales in 2013 totalled 176 properties compared to just 52, 3 years ago - that is going from selling 1 per week to selling 3 per week.

Three years ago the largest segment of sales representing 2 in every 5 properties sold by Barfoot & Thompson were at a price of less than $400,000; whereas today that largest segment is represented by property priced between $600,000 and $1 million which represents 1 in 3 of all sales, whereas property below $400,000 has slipped to less than 1 in 4 of all sales.

Clearly the Auckland market continues to show strong demand and appreciating prices - in December Barfoot and Thompson reported that the average price for all property sold in the month has exceeded $700,000 for the first time ever. That growth is not likely to be arrested any time soon given the signals of economic growth and vibrancy of the Auckland economy in the coming year. 

Auckland house prices continue their relentless rise

In the space of just 5 years the Auckland property market has risen by 52%. Back in November 2008 the Stratified median price in Auckland as measured by the Real Estate Institute was $435,700. The November sales data for 2013 shows that median price is now $664,100. Five years, a total increase of $228,400, that's more than the average annual earnings in Auckland over that period!

As ever peaks and troughs in property markets are only ever able to be judged in hindsight, but buying a property in November 2008 now seems like a smart move, although at the time there would be many calling it a risky move given the trend of declining prices at the time.

Future Trends

The question often asked in relation to the prediction of property prices is how best to judge future prices based on past trends. This is, as often stated, not an exact science. However with over 30 years of data from the Real Estate Institute it is certainly worth exploring.

For comparisons to be made from one time period to the next requires a degree of normalising; which when it comes to prices, whether that be for property or households goods means adjusting for the impact of inflation. The general rise in prices as a function of inflation is far different from specific price rises caused by pressure of supply or demand, as is often the case with property.

Using the Reserve Bank Inflation Calculator and applying it to the monthly data of Auckland Stratified Property Prices produces this chart below which shows a somewhat different picture as to price movement for the past 6 years.

The rise of 52% in today's dollars equates to a 37.8% increase when adjusted for inflation - still a significant rise over 5 years, however as can be seen almost all of that rise occurred in the past 2 years, as before that property prices adjusted for inflation hardly rose at all.

This steep rise of the past 2 years is pretty significant. From the starting point of October 2011 - 26 months ago the CPI adjusted Auckland median house price has risen by over 29%!

I thought it would be interesting to compare this rate of increase with the last time we experienced a very active period of house price growth back in 2002. That point was the start of what became a relentless rise which over a 5 year period saw property prices rise close to 70% in real terms, only ending with the start of the Global Financial Crisis.

Taking just the comparable 26 month periods which commenced these periods of steep growth the period of December 2001 to Jan 2004 was a 27.2% rise. So by this measure we are current witnessing a faster rate of property price appreciation than the period cited by many as a period of rampant property inflation that we would never see the likes of again!

The question then has to be asked as to the likelihood of the property price appreciation continuing for another 3 years from now based on the parallel of the past 26 months of the 2001 run in property prices?

As ever that is a very hard call to make. The factors driving the rise in 2003/4 were very strong global economic activity backed by a strategy of targeted low interest rates as the US Federal Reserve sought to ensure the US economy staved off the recession and impacts of 9/11. Technology was driving prices lower and the powerhouse growth of China and the rest of  BRIC countries.

That was 2003/4, as to 2012/13 the world is emerging, still slowly from the GFC, the US economy and the British economy are picking up steam and the forecast for the NZ economy is for very strong growth, some say growth not seen since the 1970's. Add to this the migration expectations as they are likely to be felt more strongly in Auckland and then overlay the ever present issues about new construction of residential property and you have the seeds of strong factors for continuing property demand. Finally the cost of finance is targeted to rise, certainly a dampener on property prices, but when and by how much is debatable. In relative terms a 1% or 2% increase in mortgage rates will be significant when the current rate of 6%, but finance for property at 7.5% or 8% is in the long term still considered manageable.

In the short term the trend of property prices will likely be a slowing of growth. That is to say that when property prices take off as they have over the past 2 years the rate of growth has to slow as rises of 15% or put to 20% are unsustainable -  a 10% or below rate of annual growth is more likely - still seeing prices rise.

The chart below tracks the first 36 months of the property rises from December 2001 as measured as year on year growth and then tracks the 26 months of the 2011 to date run. An similarity of price growth trend - but very likely to tail off in the next 12 months.