New Capital Values demonstrate an archaic system

by Alistair Helm in


Today, the 10th November thousands of Aucklander's reached for their web browser to witness the reveal of their latest Auckland Council Capital Valuation for their property. Far from horror or celebration the universal reaction was of frustration. Frustration because the majority could not gain access to the web server to discover their latest CV.

This experience in my view is unacceptable in 2014. We live in a world of ubiquitous, almost unlimited computing power - a world where you can through services like Amazon Web Services spin up unlimited servers to power any scale of usage at a fraction of the cost of most traditionally owned hardware environment, and only pay when you need it - like today as Auckland could have done to save loosing their whole website .

This experience is for me a demonstration of how archaic the whole Capital Valuation system is. I have in the past written about how we should get rid of CV's as they are a wholly misleading method of establishing a value on a property. Well now I think the experience of not being able to find out the latest Capital Valuation on my property demonstrates how we should re-examine the whole process.

I am not going to get into the political issues as to whether or not basing local authority rates on property valuations is right or wrong - but let's just say it is a fair method. How then could we improve it? 

The problem is that re-assessing values every 3 years is mad. Thirty years ago undertaking a re-valuation every 3 years was the best that could be done as the process to assess half a million homes took 3 years. Today algorithms can re-assess valuations every day if required. Zillow in the USA updates the estimated valuation of 100 million homes every couple of weeks - they are not a government agency - they are simply providing this insight next to property for sale to assist home buyers. 

Core Logic which is contracted to provide Auckland Council and most local authorities with a re-valuation every 3 years has a dynamic algorithm which re-assesses the property inventory of the whole of NZ at the flick of a button. They provide dynamic services to banks who use this capability to ensure they are constantly aware of the state of their lending portfolio. This algorithm takes input every day from recent sales, building consent data and registered valuers. It crunches these data inputs to create a re-valuation, house-by-house, suburb-by-suburb, district-by-district. This is the origin of the QV monthly report into valuation changes in property.

So why don't Council's use a 3 monthly re-assessment of capital valuations. The data is held by Core Logic they can simply take a feed of that data every 3 months. That way the "reveal" of new Capital Values becomes a less dramatic news story - I know the media will be disappointed in this as they have had a field day over the past weeks leading up to the latest reveal. 

For homeowners this new process would provide a genuine public service and demonstrate equitable rating apportionment as the annual rates would be based on a far more current assessment of relative value.

 

 

 


Auckland property - a price too far!

by Alistair Helm in


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.  


Property musings on Facebook - 17 October

by Alistair Helm in


Here are the articles posted on Facebook over the past week - short, spontaneous insights and observations which I felt needed immediate discussion and didn't warrant long-form articles written.


Latest commentary on the property market








Property musings on Facebook - 10 October

by Alistair Helm in


Here are the articles posted on Facebook over the past week - short, spontaneous insights and observations which I felt needed immediate discussion and didn't warrant long-form articles written.

 

First signal of poor September sales





Properazzi musings on Facebook this week - 9 May

by Alistair Helm in



Hometopia - everything home buyers & sellers need online

by Alistair Helm in


The new property website born of the excellent book "Where to Live in Auckland" was launched last week and certainly provides a rich online library of comment, articles, insight and data to help people better appreciate the Auckland market right down to the local level. In my view it certainly lives up to the proposition as "everything home buyers and sellers need". 

The site is certainly comprehensive, I would estimate over 230 individual pages, however it can feel somewhat heavy to use at times with a lot of text. There are though some beautiful components of the site!  

Where do I fit?

This would be my favourite section. A very subjective grouping of Auckland suburbs into somewhat 'tongue in cheek' descriptors such as Greenies - Titirangi / Grey Lynn / Swanson / West Coast Beaches / Hauraki Gulf Islands / Kingsland, or Culture Vultures - Auckland City / Parnell / Takapuna / Ponsonby / Howick / Titirangi. Many suburbs cross over between different categories to demonstrate the eclectic nature of Auckland.

This feature reminded me of an excellent feature from the Australian suburb selection website CityHobo which defines suburbs by shoe brands - the suburb defined by Converse as opposed to Jimmy Choo! 

 

Suburb Sleuth

This feature provides a whole new slant on property searching online, something wholly missing from all other property portals, the ability to search by lifestyle and amenities, style and schools.

It's very cool and provides some great insight into opening up new ideas on where to live in Auckland. So if you place a greater importance on excellent schools, than say commute to the CBD then you can apply this to your suburb selection criteria before you invest time in reviewing property for sale.  When using this section don't forget to tick the 'Advanced Search' button - this allows you to not only select a region or environment but you can also specify how important that is, thereby allowing yourself to be open to explore new ares of Auckland.

 

As with most of the site the core driver of the user is to individual suburb pages which are the distillation of the original book, across the 50+ suburbs in Auckland. These pages provide a good personal evaluation of the character and characteristics of the suburb. The site is very clearly and non-apologetically commercially focussed to encourage you to buy the complete book (Where to live in Auckland $44.95 / The Streetwise Buyer $29.95) or at least a suburb profile $5 each.

 

The site will certainly appeal to all property buyers (and renters) across Auckland, however its greatest appeal I think will be to people new to Auckland and keen to better understand the region and the make up of the suburbs whether they come from around the country or from overseas.  

 

No review of the site would be complete without some critique after all I would be the first to concede that we can always improve upon something and learn from others, so here are a couple of pointers to make the site even better! 

  1. Property listing integration - Within each suburb page there is a link to view homes for sale in that suburb, this takes you off to the listing page on Trade Me for that suburb. A functional link, however these days integration and mashing of data can provide a richer user experience. Using the open read API from Trade Me would allow this site to showcase all the relevant properties on Trade Me in that suburb on this site, all dynamically integrated thereby adding to the appeal and relevance of the site. 

  2. The site hosts a page for each suburb providing a sense of the character as well as a separate page for the same suburb providing property price trends (How's my suburb performing?) . These pages provide no cross links and yet are so critically interlinked for someone using the site for fact finding on purchasing a property. Some simple cross links would help

  3. As this is a site helping you to answer the question of where to live in Auckland, there is a conspicuous lack of any dynamic maps to help you better contextualise the region or to provide a searching by map functionality. Also a simple search box to find a suburb again is conspicuously missing. 

  4. The suburb page that provides the key numbers on property prices per suburb needs to detail the source and date of the data. Property data is critically important but only when context is provided, such data is meaningless when it is out of date.

 

Overall I think Stephen Hart and the team at Barbican Publishing have done a great job to provide property buyers and sellers with yet more valuable information and services helping them become smarter. 

 


Housing affordability involves a multiplicity of issues

by Alistair Helm in


Transient

The government have now added their “two pennies-worth” to the question of affordable housing and the Auckland housing crisis, after the Productivity Commission report from earlier this year. The critics clearly feel that the government’s response is at best another example of “kicking the can down the road”, rather than grappling with what amounts to a massive strategic issue for this country.

There are a multipilicty of issue around affordable housing and the housing crisis facing Auckland primarily. The issue of affordability is not solely about cheaper land to build cheaper homes, it is equally about improving the income of the working population so the wealth of the country improves. This in a way speaks to the very foundation of this issue – our future as a country.

Put simply we as a country risk irrelevance on the global stage if we cannot grow. Grow our wealth, grow our people, grow our economy. To do this we have to attract and retain the best and the brightest talent to make NZ a home from which they can engage with the world. To achieve this we have to build the infrastructure – that is all about housing as primary infrastructure (not just roads, utilities, amenities) all else follows where people live or want to live.

The land issue

Yes we need more land – Auckland has to build 400,000 new dwellings in 30 years to meet the expected growth in population. There is a spoiler alert here which we should not ignore – if we don’t build what people want in terms of housing and enough of it at the right price, and then this incremental population may not eventuate in Auckland. This natural increase in population coupled with inbound growth may end up being dissipated around the country and thereby alleviate some of the problem and as consequence we may actually not need 400,000 new dwellings!

The current Auckland plan calls for 300,000 of the 400,000 new dwellings to be built within the current boundary of the city. If built at the density of terrace houses / low rise developments (25 dwellings per hectare) this would require 12,000 hectares of land – that is 120 square kilometers. The current land area of Auckland is 559 square kilometers, hopefully we can all now see the issue. If we tried to build single family homes instead to meet this need for an incremental 300,000 dwellings we would need 250 square kilometers (12 dwellings per hectare) – that’s close on half of Auckland land area! Impossible.

We have to adopt and embrace urban quality intensification. We have to grow up and realize that Auckland is not just a bigger version of Palmerston North. It is a city. It wants to be, and we want it to be a globally competitive world city, for that it has to stop thinking about single family homes. It has to remove the phobia of height. It has to build quality new developments of medium intensity – that means 3 to 5 levels. Think what defines other world cities, it is density, not in one area, but in many areas. Auckland sprawls and adding to the sprawl by opening up greenfield developments to single family homes will not do anything to sort out the issue – it is more than likely to have catastrophic effects.

Its not all about ownership

The other issue to address is home ownership – the fact is current ownership is around 65% - city dwellers of the future are probably less likely to be owners. For many reasons not least of which is costs, mobility, and convenience. It could be the case that in the future over half of all the new Aucklanders we need to house may be tenants, may actually want to be tenants – they may actually see renting as a viable long term solution – why not? when so many other cities have abundant tenanted properties.

This is where the issue of the housing crisis lurches to a whole new area that I think needs examining – our current attitude and incentives to rental property.

More than two thirds of our rental housing stock is owned privately and managed privately, typically comprising an investment portfolio that is judged to be the personal nest-egg for a large number of kiwis. I judge that this is actually a root cause of the housing issue. This form of investment has for too long been disproportionately icentivised. However this is not a viable model to deliver 200,000 rental properties in the future. We need scale and we need patient investment capital.

Imagine if you will a development of new apartments or low rise town houses as part of the Auckland of the future. All owned and managed by an investment fund (not a finance company, but superannuation investment company focused on long term value). This development was built for and designed for the long term – 50+ years, it is environmentally and economically efficient. It was built leveraging scale, using modular design and built with negotiated contracts of materials and labour that could never be achieved by individual builders.

The properties are rented, not with a 90 day notice period, but tenants are open to have longer tenancy right – 1 year, 3 year, 5 years. The key here is the tenant has the right to occupy and the right to vacate. The property is maintained and rated to recognise the use of services and required infrastructure. All parties are catered for – the investment owner has a long term surety of the building and the value of long term tenants, they built at a cost that is lower per dwelling and per m2 than traditional buildings by leveraging scale. They think to the future to lower operating costs by investing up-front in design specifications.

So does this cut out the private investor? – no, investors can buy shares in this investment company as part of a balanced portfolio. Certainly they can continue to gear their investment, not at the ridiculous levels of 5 to 95 as has been the case with residential property investment in the past, but at more appropriate levels that demonstrate better financial prudence. This will allow property to be better judged as an asset class not the only asset class.

I think our approach to rental property is actually a key component of our approach to building and housing and a core part of the future strategy for our bigger city – our global city of Auckland.


Auckland housing - a crisis in the making

by Alistair Helm in


Transient

This was the quotable opening comment from Doug McKay, CEO of Auckland Council speaking yesterday at the NZ Property Council conference on Residential Development for Auckland.

Naturally the private sector for which the Property Council advocates and represents judged somewhat more critically, that Auckland housing is already in a crisis. A little bit of tension between private sector and public sector is nothing new and hardly unexpected. However having said that, the conference did demonstrate a fair degree of collaboration and respect for each other’s role in delivering the future vision for Auckland.

I was invited to attend the conference as a guest of the Property Council and as someone who would judge themselves as not much more informed that the average Aucklander, I came away from the conference with a mix of feelings.

Auckland has to change, it has to grow, it has to build and it has to get going fast!. The question is – is the progress fast enough? as one speaker commented in a some-what off-the-cuff remark “or central government may take charge to ensure the development gets done, as is happening in Christchurch” – this was taken as a sober consideration, with much substantive foundation support for this view from many attendees.

Anyway lets dissect this Auckland Housing Crisis. The numbers are a great way to start.

Auckland City’s Plan sets out the 30 year horizon, a timescale within which Auckland is expected to grow from the current 1,500,000 population to 2,500,000. That extra million people will require an extra 400,000 homes to be built. Roughly 300,000 of which will have to be built within the existing boundaries of what they now call the RUB (Rural Urban Boundary) – the remaining 100,000 will be built in what is currently greenfield areas, specifically to the South around Pukekohe, the West out to Whenuapai and Kumeu and to the North up towards Warkworth.

This scale of development is daunting, 13,000 dwellings a year for 30 years,  match that to current run rate of the consents of the past 5 years at around 4,500 a year, and you have some perspective on the crisis (looming or real) – oh and by the way the clock has started!

The good news or at least the motivational incentive to get going, is the economic value that this will contribute to the local and national economy – as estimated by Martin Udale of Essentia Consulting a direct construction benefit of at least $150 billion with a 3+ times multiplier adding up to a total of $500 - $600 billion.

These numbers are all great, but the big question which needs to be grappled with and was to some extent in the ensuing sessions, was what type of building, where and at what cost?

The valuable data presented by Alan McMahon of Colliers pointed to the trend of the likely owners / tenants of these new dwellings of the next decades. They will be 30somethings who want convenience. Convenience in location, lifestyle and maintenance – they have no aspiration for cutting grass or general DIY. They do want quality and private space. They do want more than a shoe box sized apartment but they do not want the current serviced supply of 4+bedrooms homes of 218+ m2 at a price point of c. $1m which according to Todd Properties is what has been selling-a-pace at Stonefields over the past year.

This trend to intensification of future dwellings will reflect the cultural change, which will see Auckland become a minority urban area for European origin kiwis within the next 5 years.

To find the space to build these incremental 300,000 dwellings will require demolition of existing housing stock to allow density levels of the current 15 dwellings to the hectare to rise to over 25 per hectare and upwards of 50 – 100 a hectare in the city centers with high rise apartments. The question that is then posed is how will this demolition and rebuilding be managed to maintain cultural heritage and also to ensure appropriate urban design to ensure there is cohesion of amenities and communities so that we don’t end up with bland enclaves of dormitory housing?

The other critical aspect of the crisis and one that continues to receive significant press is the question of affordability. Reduced dwelling size and intensification will go someway to reduce overall cost, but the constant cries over development contribution as opposed to apportioned future general rates for these new developments did not seem to have found any favour with the public sector who clearly feel that with the capital costs of maintaining and upgrading existing infrastructure the added capital burden of shouldering the development costs for new dwellings is something better borne by developers (or as was rightly pointed out – property buyers).

Given the scale of this massive challenge and given the focus that it is receiving matched to the fact that this was the first full day conference on residential development held by the Property Council in Auckland, there is comfort to be gained by witnessing the participation of the major development companies who are members of the Council. Their strong balance sheets, long term perspective and collective vision for a quality solution in partnership with the Council could just have us achieve this vision. There is a clear view that with the outlook for commercial property not as rosy then their collective focus to residential could address the issue and match their business cycle need.

As was stated early on in the day the watch word for the future of Auckland in the context of residential development is “Quality intensification” – however you define it. My hope is that is delivers vibrant communities, served by robust infrastructure, that attracts and retains the best and most creative talent to make this city one of the most livable in the world.