I read with interest the weekend opinion article by Duncan Garner in the Dominion Post titled “I’m an instant millionaire - but can’t afford my house”.
I have been following Duncan’s commentary recently on his radio show and online - his focus is the un-affordability of Auckland property. He comes with a great perspective having lived in Auckland for only a couple of years, moving up from Wellington and thereby being able to make relevant comparisons. I respect and admire his personal crusade as he is right when he says “If you want to buy cheap (and "cheap" in Auckland is $500,000) you have to head way, way out west - or seriously south towards the Bombay Hills”. Auckland property has risen in value by 37% in the past 3 years, 44% in the past 5 years and 83% since 2004.
However I believe there are some alternative perspectives to his views to both the problem and the perceived solutions as well as some corrections to some of his assertions. Here are my responses to his article.
Duncan states that “the value of my home soared by 58 per cent - up by $268,000 over just three years” - this is a gross over simplification. The value of his house on paper will only be accurately assessed by a property valuer. The quoted 58% increase refers to the median increase across all properties in the New Windsor suburb, the individual local authority capital valuation for his property will not be made public until the 10th November, even then that figure will only be a computer generated valuation. The true scale of the increase in value of any home is only ever realised when you sell. Every other number is simply speculative.
Duncan makes the comparison of Wellington properties. Far from selling way above their CV, they are actually selling below their CV. No surprise here. The fact is whereas Auckland sale prices have increased as cited above, Wellington have barely moved. Wellington property has only risen in value by 4% in the past 3 years, 4% in the past 5 years and just 45% since 2004. The local authority assessed Capital value is based on recent sales and therefore if recent sales prices don’t experience inflation then nor does CV’s.
The contention of Duncan’s article is that the Auckland property problem is one of supply and demand. In someway’s in my view he is right and in someways he is wrong. Demand is what is driving the property market. Without demand there would not be competition and that is what inflates prices. However the supply problem is less significant.
If Auckland had an acute shortage of property driven by the rise in population the issue would be seen in genuine demand for any housing, right across the board - property for rent and for sale. The fact is there is not excess demand for rental property as demonstrated by the inflation of property rents in Auckland rising by 9% in the past 3 years, 20% in the past 5 years and only 35% since 2004. These levels are only barely above inflation and therefore show no impact of demand.
Auckland’s property price inflation is the result of speculation and an overall increase in the ability on the part of property buyers to pay that extra dollar to buy the house they want to live in or invest in. Auctions for property that see active competitive bidding are not attended by people without a house looking for somewhere to live. They are populated by people with a house looking to buy another house to replace their current one or a further property to invest in. These buyers are making decisions that are a mix of rational and emotional triggers that drive then to bid an extra $10,000 / $20,000 / $50,000 more than they thought they would. That sale price then becomes the new ceiling by which the next property is launched onto the market and the inflationary pressure persists.
The fuel for this property price inflation is a ready access to funds and cheap funds. The past 5 years have seen the lowest mortgage rates that NZ has ever seen in modern times and whilst the recent LVR policy has stifled the market to some extent, the demand has simply switched from property owners to investors.
Duncan is right when he says that “Auckland needs to build 13,000 houses a year to keep up with demand - this year it won't crack 7,000, and apparently we're booming” - we need more houses. However this short fall in construction is not the problem and will not be the solution. The solution lives in the financial component of property market - the access to and the cost of finance. That is what has driven this recent property price boom as it did between 2002 and 2007.