Auckland Property Insight April 2019
Ten times a year, Auckland Property Insight provides a summary and analysis of recent market conditions. In essence, we try to make sense of what we see in the rear view mirror. Our April Auckland Property Insight edition, the first of the financial year, is different. It’s the one issue where we look ahead and predict how things are likely to be. To do that, we partner with leading independent economic forecasting and consulting company, Infometrics. Our predictions are not infallible (and as a sensible investor you should always exercise your own knowledge and judgement rather than basing investment decisions solely on another’s viewpoint). However, it does mean you can be confident that the following analysis is based on extensive research and understanding of the housing market and therein shows its value.
More Falls in Migration to Come
New migration data from Statistics NZ shows that net migration eased from 63,900pa in July 2016 to 55,800pa by September 2017. Provisional data up to January 2019 suggests net migration could be rising again, although this outcome would be surprising given previous government policy changes. Between 2015 and 2017, the National government tightened up rules relating to foreign students, residence approvals, and work visas, changes that should all be placing downward pressure on arrival numbers. Since 2016, there has also been some increase in the net outflow of Kiwis as New Zealand’s economic growth has softened. Nevertheless, the extent of this outflow has been limited by the fact that Australia’s unemployment rate, at 5.0%, is still well above New Zealand’s rate of 4.3%. Migration is expected to decline further throughout 2019 and 2020 in response to additional policy changes by the current government. These changes include tougher rules for foreign students wanting to remain in New Zealand after completing their studies, a further reduction in residence approval numbers, and plans for more targeted immigration to address skill shortages around New Zealand on a regional basis. The latter policy is expected to help take pressure off infrastructure in the main urban areas, which traditionally have taken the bulk of new migrants. Indeed, the policy changes that are being considered by the government are likely to have a disproportionate effect on Auckland’s population trends, reducing arrival numbers of immigrants into the region and leading to a more marked slowdown in Auckland’s population growth than in some other parts of the country. Infometrics forecasts that net migration will ease to about 15,600pa by the end of next year, with further small declines thereafter. This outcome would see population growth in 2020 slip below 1.0%pa for the first time since 2013, less than half the peak rate of 2.2% recorded in March 2017.
Rental Yields Set to Improve
Rental inflation in Auckland is lagging most of the rest of the country. Average rents in Auckland for the three months to February 2019 were up 2.6% from a year earlier, compared to nationwide growth of 5.6%pa. Marlborough was the only region to record weaker rental inflation than Auckland. Nevertheless, with house prices in Auckland declining, rental yields in the region have been gradually increasing from their record lows since late 2017. Infometrics expects the supply of property that is available to rent to be stagnant over the next 1-2 years. Eighty-one percent of respondents to the latest Crockers Property Investment Index (CPII) survey believed that a capital gains tax would have a significant effect on residential property investment activity over the next five years. Uncertainty about the possible introduction of a capital gains tax could discourage people from purchasing investment property. The potential to lose up to one third of future capital gains reduces the relative attractiveness of residential property investment and would encourage investors to put their money into other investments instead. A capital gains tax is not the only factor that threatens to reduce the return on residential property investment. Other deterrents for investors that were surveyed included falling house prices (cited by 43% of respondents as likely to have a significant effect on residential property investment activity) and healthy home standards (33% of respondents). These factors are likely to constrain the supply of property available to rent at the same time as difficult housing affordability conditions keep tenant demand for property relatively strong. Upward pressures on rents is likely to be maintained, pushing up rental yields further, particularly in Auckland.
Buyers Sit on Their Hands
Housing affordability is a major constraint on potential house buyer numbers in Auckland. The region’s sales volumes in the three months to February 2019 were down 14% from a year earlier – a larger drop than the 4.1% decline recorded around the rest of the country. The greater prevalence of property investors in Auckland, compared to the rest of New Zealand, means that government rule changes have had a bigger effect on the region’s housing market. The extension of the bright-line test from two to five years in March 2018 has significantly reduced the attractiveness of short-term speculative purchases. Restrictions on foreign buyers from October last year have also affected demand, with data showing that there had been a higher proportion of overseas buyers in Auckland than across most of the rest of New Zealand in the lead-up to the ban. Even the Reserve Bank’s moves to relax its loan-to-value ratio (LVR) restrictions at the start of both 2018 and 2019 have done little to spark demand. The “fear of missing out”, which drove purchasing decisions a few years ago, has disappeared. Buyers can now take their time and not worry about being priced out of the market further by rapidly rising property values. There might be some scope for house sales activity to edge up over the next 18 months as the Reserve Bank relaxes the LVRs further and mortgage rates remain near record lows. However, respondents to the CPII saw these two factors as the least likely to have a significant effect on residential property investment activity over the next five years. Any scope for an increase in house sales volumes is probably greater in those regions outside Auckland where affordability is less of a constraint for buyers. Indeed, only 51% of CPII respondents felt that Auckland currently offers good opportunities for residential property investors, even considering investment decisions over a ten-year horizon. This shift in investor focus away from Auckland contrasts significantly with responses to a similar question asked in 2016, when over 80% of respondents favoured Auckland. Investor interest across the rest of the country appears to be much greater now than it was three years ago.
House Prices Set to Decline
House prices in Auckland fell 2.1% over the year to February according to data from the Real Estate Institute, the biggest decline since 2009. But outside Auckland, price growth has been accelerating since June last year, reaching 7.9%pa in the latest data. Auckland’s affordability problems and restrictions on foreign buyers are constraining demand and appear to be preventing any further house price rises in the region. Nevertheless, solid economic growth, a tight labour market, and low mortgage rates mean that property owners are under little pressure to sell. Some vendors will lower their price expectations in coming months, which will show through in further house price declines, but forced sales are likely to remain rare. More than half of all respondents to the latest CPII expect house prices in Auckland to fall over the next year, up from about one-third of respondents who expressed a view on the region’s house prices in last year’s survey. Falling house prices were also the second most commonly chosen influence by respondents on residential property investment activity over the next five years, behind the prospect of a capital gains tax.
Outside Auckland, Infometrics expects slowing population growth and softer economic growth to be the predominant influences on house prices during 2019 and 2020. These negative factors are likely to outweigh any stimulatory effects of low interest rates or more relaxed loan-to-value requirements.
Interest Rates on Hold
The Reserve Bank’s most recent Monetary Policy Statement, in February, showed that the Bank expects to keep the official cash rate (OCR) at 1.75% until the second half of next year. The continuation of the OCR at its record low reflects a lack of inflationary pressures within New Zealand as well as concerns about economic growth prospects, both domestically and internationally. These growth concerns have led some forecasters to predict that the OCR could be cut by the end of this year. However, this outcome would require a sharper downturn in GDP growth than is currently anticipated for New Zealand. Infometrics expects the OCR to remain on hold at 1.75% until August 2020, before rising thereafter. Low wage inflation is the most surprising aspect of the lack of price pressures. Surveys show that it is difficult for businesses to find staff, and anecdotal evidence suggests that wage pressures are picking up. However, those pressures have not shown through in official data to date. Accelerating wage inflation is likely to be a precursor to any interest rate rises by the Reserve Bank next year. Slowing economic growth internationally has pushed down longer-term interest rates. As a result, fixed mortgage rates remain very attractive for borrowers. These conditions are unlikely to change materially over the next 12 months.