ANALYSIS: Back in November 2012 I published a list of 19 reasons why Auckland house prices would keep rising. At the time they had gone up 11% from a year earlier and in the following four years they rose another 77% to be double what they were in the middle of 2011. Prices are now 1.7 times higher than back then but starting to correct downward from their pandemic-driven heights.
If I were to run through the list of factors now, what would they imply? Leaving out a handful which were mainly fluff, let’s start with those on the list which now imply flat to falling prices.
1. A shortage of construction heading into the 2008 recession. Now new house supply is booming and double the ten-year average.
2. Government policy was aimed at boosting Auckland’s population to deliver “agglomeration” benefits from lots of people in one place. Now, no efforts are being made to stem the population loss from Auckland to the regions and offshore, and migrant numbers are being restricted. Most migrants go to Auckland.
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3. Back in 2012 there was “catch-up” buying to be done by young buyers who had put things on hold since 2008 because of job losses and worries about falling house prices. Now, the labour market is strong but prices are falling again and likely to fall further. No period of catch-up buying appears imminent.
4. Interest rates were low and set to stay low for a long time back then. Now, interest rates are rising.
5. The migration cycle was on the cusp of turning upward. Now, it is turning downward with a generational brain drain period coming up.
6. The unemployment rate back then was 6.8% and set to fall. Now, although job security is high, further falls in the jobless rate will be minor because fewer people are available. New, job-secure purchasers of houses will be far fewer in number.
Economist Tony Alexander: “The factors in play do not argue for very strong price declines.” Photo / Fiona Goodall
7. Government policies aimed at improving housing affordability were minor and unlikely to have much impact for years. In contrast such measures are strong now, especially relating to potential for new dwelling supply.
8. Baby Boomers were seeking returns better than bank deposits by purchasing property. The Boomers are older, but bank deposit rates are now much worse after adjusting for inflation. The incentive to stay in property and purchase more seems stronger from this angle. But it is diminished by age-related goals, reduced bank willingness to lend to older people, and reduced tax effectiveness.
Now, here are the factors from back then which still imply higher house prices.
1. Removing the ability of investors to use loss attributing qualifying companies and depreciation claims to maximise tax benefits had produced no wave of investor selling back then. The same lack of a wave is happening now despite additional moves aimed at reducing the tax position of property investment.
2. Construction costs were rising as a result of ever-strengthening building standards. Now, standards keep getting raised and materials costs are soaring. This factor is perhaps stronger than it has ever been as a supporter of house prices on average.
3. Apprentice numbers back then had collapsed so ability to boost construction was very limited. Now, although trainee numbers have soared, staff shortages look to be worse and this will further raise costs of new house supply, especially as staff go to Australia.
4. Banks were reluctant to step into funding property developments. Now, there is again caution not so much towards experienced developers but the many newer ones.
5. The household occupancy rate was facing downward pressure from an aging population. The same dynamic is in play.
My interpretation is that in aggregate the fundamental factors in play do not argue for price gains of 9% per annum as happened on average from 2012 through 2019. But they also do not argue for very strong price declines, especially now that the credit crunch, which started mid-2021, is easing, according to results from my latest survey of mortgage advisers with mortgages.co.nz
This somewhat unusual analysis method doesn’t suggest expecting another 5% to 10% of price declines in Auckland is too pessimistic.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
