Is property price inflation in 2013 a repeat of 2003?

Ten years ago in 2003 NZ was in many ways the same and yet so different. Helen Clark was PM with Bill English as leader of the opposition (replaced later in the year by Don Brash). Top film of the year was Whale Rider, whilst NZ population tipped past 4 million. It was a sorry year in Sport with Team NZ loosing 5-0 to Alinghi in the America's Cup and the All Blacks ending up loosing to Australia in the Semi-Final of the Rugby World Cup. 

In the property market things were to say-the-least active. Sales of property were well on their way to a new all time record of over 120,000 in the year (2013 looks set to be around 81,000). As for prices; at the start of the year the average property sold for $203,550 (Stratified median price) and by the end of the year it would have cost $248,450 - a 22% increase. The largest single year increase in prices on record of the past 20 years.

2003 was the year when property prices really took off. A year earlier at the beginning of 2002 the stratified median price for a NZ house was $177,850. Over the next 5 years and 8 months prices would more than double, rising 131% to $379,075 by the end of the bull run in September 2007. 

So the question remains - are we about to witness a similar stratospheric rise in house prices? 

A good indication can be seen in a chart I have developed which tracks the cumulative rise by month for each year of property prices indexed based on the December price in the preceding year. This model provides a means to directly compare each year side-by-side. 

The series of charts below track the Best and Worst years of the past 20 years as well as the Median and the current year to date. All charts utilise the REINZ Stratified Median Price Index thereby presenting data for NZ / Auckland / Wellington / Christchurch / The North Island excluding Auckland & Wellington and finally The South Island excluding Christchurch. 

Total NZ

2013 is clearly not close to 2003 in relative growth rate although it is well ahead on the median. The month of August certainly saw a significant up-turn.

Auckland

A very interesting picture in Auckland. 2013 is certainly shaping up to be similar to 2003, in fact August has taken the annual rise so far ahead of 2003; however Auckland saw the highest rise in 1994 not 2003 and so far 2013 is behind that rise.

Wellington

It certainly looked to be a repeat of 2003 for Wellington in the early months of 2013 with monthly growth tracking almost exactly inline until May when prices came  back and now are tracking exactly inline with the median. Interesting again for Wellington the best performing year was not 2003 but 1997. 

Christchurch

In the Garden City 2013 is turning out nothing like 2003, which for the city was the best performing year of the past 20 years.  After 8 months cumulative price rises in the city are exactly in line with the median rise.

Other North Island (exc Akl & Wtn) 

Interesting that the remainder of the North Island regions saw the peak of property prices in 2005 rather than 2003. For this area of the country 2013 looks nothing like 2003 - another very average year of cumulative increase of less than 4% so far. 

Other South Island (exc Chc)

Rather as with Christchurch the remainder of the South Island is no where near 2003 pace of property price appreciation. The current year is tracking inline with the median and showing barely 1% cumulative rise this year so far.

Global property markets follow in step

I am a big fan of Twitter as my predominant news feed, far more a news media service than a social media service. It is easy to follow those people and organisations that are the pipe-fee of news that is contextual top whatever area of interest you hold. For me it all about property and the real estate industry in New Zealand and Globally.

It was through one of these followers that I saw this chart providing an interesting perspective on the comparative performance of US house prices over the past two decades on an index whereby December each year becomes the base for the growth / decline in house prices month by month through the year.

Further evidence that we might pine for the economy we have now in a couple of years. pic.twitter.com/sgvhGGlWOW

— Galen Ward (@galenward) September 24, 2013

So for the US market which went through a major boom and bust in the past 20 years it is interesting to see that this year they are tracking to see close to the best growth in house prices (admittedly off a low base). The chart below shows the actual indicies of house prices across the major markets over that 20 year period.

Having seem this chart tracking the US cumulative change in house prices from December, I was naturally drawn to create a chart for the NZ market. Thanks to the data from REINZ Stratified Price Index I have (thankfully!)been able to produce a match as seen below: 

It is quite striking the similarity between the US and NZ house price index - the worst performance year is matched at 2008, the US slipping further down 10% vs 7% in NZ, the best year is very close; NZ is 2003 at 13% with US 2004 with 11%.  

This would certainly be a clear demonstration that whilst domestic property prices have a local market factor they do seem to follow in step to global economic effects that flow through to the property sector.

Are we losing access to vital property data?

I feel like the lifeblood for the analysis of the property market is being drained from me. I have in the past commented as to how fortunate we are in NZ to have such rich property data, how timely it is and how openly accessible it is.

Sadly I now have to report that the core custodians of property information are heading down a path – either collectively or independently to close off access to such valuable data.

First we had the proposal by Property IQ to acquire Terralink. This is now in the hands of the Commerce Commission who I am confident will find that this acquisition would seriously remove competition in respect to consumer property information – for a start it would be the death of Zoodle as Property IQ would strengthen the dominance and profitability of QV as the only place where you could get as a member of the public, historical sales data and estimated property valuations. The decision is due from the Commerce Commission on the 11th October so I will await that notice with great interest. Out of interest the original date for the decision was the 13th September, this has been extended - could be that the CC team is looking closer into the issue or maybe their overall workload is holding them up?

Following that potential blow I now see that the Real Estate Institute (REINZ) is quietly closing off more and more data that was at one time publicly available for free.

Firstly they removed the downloadable spreadsheet for the Stratified House Price Index which provided historical monthly median and stratified median prices for Auckland, Wellington, Christchurch, Other North Island, Other South Island as well as National data month-by-month back to 1992.

The offering now is purely a pdf chart.

The raw data allowed me to produce the analysis charts I have regularly done to highlight the % variance to market peaks and troughs as per the example here.

Thankfully as I collated the data from 1992 though legal access to these spreadsheets in the past I can now update the data set with the monthly figures REINZ publishes. 

The other database that REINZ has turned off is the Market Facts Graph capability. This provided the public with the opportunity to access core data by month back to 1992 by aggregated suburb showing median price, number of property sales, median days on the market and total sales value.

Below is an example of this report when it was available showing the wider Wellington region for a 12 month period.

All that is now provided by REINZ in regard to this data is the press release together with the regional data pdf. The other valuable report the Residential Market Statistics which provides the regional monthly data for recent months down to aggregated suburb level is also no longer published after July; so my advice is to go and grab the archived residential reports before they too are removed.

In my opinion restricting access to data that was once available for free is a backwards step. This is both in terms of the general principle of making data accessible, so that people can be allowed to analyse and provide perspective and insights; and in the specific sense of an industry that I am sure wants to help people be better informed about buying property rather than what could be perceived as a revenue generating decision as highlighted by the newly appearing references to paying for access to data from REINZ by the general public.

Provincial NZ property in the doldrums

The quote for the week and possibly the month for me was made by the QV research director Jonno Ingerson. On Radio NZ he stated that "the already heated house prices should continue to rise strongly for another 15 months" - Wow!

Property prices stated to rise in January 2011 - they have therefore been rising already for 30 months; could we possibly see continued growth in prices for another year-plus taking the full run of prices to 45 months! - that is optimistic. His justification seemed to be - previous up cycles tend to be of this same order - is that really a compelling case for a forecast.

I always saw QV being somewhat bearish when it came to property reporting relying as it does on data analysis and without a vested interest group to serve, but clearly that has changed. 

Counter to this more bullish prospect presented by property reporting entities, other notable commentators (Bernard Hickey & Shamubeel Eaqub) rightly believe too much focus as ever is applied to the Auckland property market as if it is representative of the whole country.

The excellent article in the NZ Herald by Bernard Hickey recently titled 'Provinces left behind' summed up the fact that this property cycle has had no effect on provincial NZ. He quotes that Auckland prices have risen 13% from their 2007 peak in real terms with Christchurch up 5% but for the rest of the country real prices are down 20% in real terms and still falling. Such figures warranted more investigation. 

Taking the REINZ Stratified Price Index data I delved beyond the usual stats for Auckland, Wellington and Christchurch and looked at two sub sets - 'Other North Island' which effectively measures the North Island excluding Auckland and Wellington and 'Other South Island' which excludes Christchurch from the stats from the mainland. 

The charts below ably speaks for themselves - this property cycle has yet to be really felt by those provincial regions. 

Are we building enough new houses in NZ?

The latest data of new building consents for July issued by Statistics NZ showed that there were 1,893 new dwelling consents issued in the month, taking the moving annual total 19,146. This is the first time that the 12 month total has exceeded 19,000 since November 2008.

However the release of the data whilst recognising the volume of activity is up 71% from the low point of March 2011 was showing a general easing in the rate of growth with a seasonally adjusted fall from June.

The scale of construction is stronger than it has been for many years but far short of historical highs, back in the 1970's annual totals exceeded 35,000 new dwellings, in the 1980's 24,000 new dwellings a year was normal and in the early 2000's we were building over 30,000 new dwellings a year.

The industry, we have been told needs to get into gear in order to respond to what has been described as a housing crisis, especially in Auckland where demand for new housing is far in excess of supply.  Over the past year commentators and politicians as well as economists and statisticians have predicted that up to an extra million residents will require over 300,000 new homes to be built in Auckland alone over the next 25 years to meet this demand. This has, as we have seen heightened the debate about issues such as freeing up more land and more intensification in our major city.

Such numbers of new builds are staggering, especially when you look and see that the total new building consents issued over the past 20 years amount to 445,000 for the whole of New Zealand. So to build 300,000 just in Auckland in the next 25-30 years when we have only built 5,000 in Auckland in the past 12 months demonstrates the massive mobilization of construction resources that will be required.

Such numbers always prompt me to have a look deeper into statistics to see what insight I can discover from pairing together information. This has been my exercise this week – examining new building consents and the demand for property in NZ.

The trend of new construction over the past 20 years has very much followed the economic cycle of the country as represented in the chart below which tracks the moving annual total of new construction consents for residential property. The highs in the early 2000’s to the lows in the post GFC crash in 2008 with the stuttering recovery to a level now of around 19,000 consents per year – for the whole of NZ.

What is interesting is the mirroring of the trend of new build consents for residential property to sales of residential property. The chart below overlays the REINZ sales stats using the same moving annual total perspective. Effectively new residential consents track the trend of property sales with a lag of 3 to 6 months.

What is important to note here is the fact that the trend of consents is not the supply of new homes, more it is the intention to supply – the likely supply flow of new homes would probably on average add another 6 to 9 months to this lag. So it would seem that the level of planned new property development is closely aligned to the trend of property sales as a surrogate for true demand.

The true measure of demand is driven by the population trend and also household composition - that is to say the average number of people per household. This household composition number had been falling through the 1990's as social influences and economic wealth saw smaller households. 

Interestingly the economic austerity as a fall out of the GFC saw a reversal of this trend as younger people stayed at home rather than seeking rental property or a first home. We may begin to see a return to the long term trend in the coming years.  

Analysing this data got me thinking as to the matching of new builds to the growth in population over the past 20 years, for in that time the population of NZ has grown from 3,552,000 to 4,470,000 and 500,000 new dwellings have been built to house this additional 918,000 rise in population which equates to around 2 people per household which would seem to imply we did build sufficient properties over the last 20 years. However there is always the ability in the long term for net surpluses and deficits to cancel each other out and yet still cause problems. Let me explain in the chart below.

This chart tracks the annual balance of new building consents to demand for property. The demand for property is calculated as the annual increase in population adjusted for household composition for that year. To that figure of new property demand is added a quantity of new builds required as a function of natural obsolescence or destruction of the existing stock of properties. I have not factored in the Christchurch earthquake, but I have factored in a rise due to leaky homes over the past decade.

The chart shows fairly effectively the over supply of new builds in the period of late 1990's early 2000's and then the significant under supply from 2009. That shortfall would seem to have been reduced in 2012 but 2013 is showing it increase again. That collective shortfall over the past 4 years amounts to over 38,000 properties.

Clearly we do need to be building more homes, without such supply we will continue to see upward pressure on existing property prices.