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Jan 02, 2016

The New Zealand puzzle: low population, high property prices (and high rents)

New Zealand house pricesNew Zealand’s housing market is now slowing, with the economy also slowing - but the slowdown has come after a significant upward spurt which has propelled prices in Auckland to stratospheric levels - and Auckland´s price rises are continuing.

The nationwide median house price rose by a meagre 0.82% to NZ$459,500 (US$308,692) during the year to end-November 2015, a sharp decline from the y-o-y rise of 7.24% in a year earlier, according to the Real Estate Institute of New Zealand (REINZ). During the latest month, house prices declined 0.1% month-on-month.

However the number of property sales in New Zealand was up 8.5% to 8,048 units in November 2015 compared to the same month last year, and up by 2.7% from the previous month, according to the REINZ. Excluding Auckland, property sales increased by 23.8% in November 2015 from a year earlier, and rose by 4.6% compared to October 2015.

Of New Zealand’s 12 regions, Auckland recorded the biggest house price rise with a 14% y-o-y rise.  Auckland has the country’s most expensive housing with an average price of NZ$ 675,000 (US$453,465), followed by Central Otago Lakes, with an average price of NZ$482,000 (US$327,883) and Wellington, with an average price of NZ$435,000 (US$295,911).

Auckland´s high price rises were followed by Otago (9.7%), Waikato/Bay of Plenty (9%), and Northland (6.1%). House prices rose in eight out of New Zealand´s twelve regions.

In contrast, Central Otago Lakes saw the biggest y-o-y decline in house prices of 9.9% in November 2015, followed by Manawatu/Wanganui (-6.9%), Taranaki (-3.2%), and Southland (-1%).

New Zealand saw spectacular house price rises of about 114% (82.6% inflation-adjusted) from 2001 to 2007. After a pause, there were three years of substantial price rises 2012-2014. Because of this, housing in New Zealand has become really expensive, for a country with such a small population relative to its landmass. 

New Zealand´s economy grew by 3.20% in 2014, up from 3% in 2013, 2.7% in 2012, and 1.4% in 2011, according to HSBC. However, the Treasury expects the economy to slow this year, with a projected real GDP growth rate of 2.1%.

Of 1,797,900 private dwellings in New Zealand, 63.7% are owner-occupied, 32.6% rented, and the remaining 3.7% provided free (September 2015). 

Median Prices by Region, November 2015

Regions Median price (NZ$) m-o-m change (%) y-o-y change
Auckland 765,000 2.20 14.20
Otago 278,000 3.00 9.70
Waikato/Bay of Plenty 392,500 3.30 9.00
Northland 336,750 -6.50 6.10
Nelson/Marlborough 375,000 -3.80 4.20
Wellington 435,000 1.80 2.40
Hawkes Bay 299,000 -1.80 1.40
Canterbury/Westland 421,000 0.20 1.00
Southland 197,500 -5.50 -1.00
Taranaki 300,000 -4.20 -3.20
Manawatu/Wanganui 228,000 -8.80 -6.90
Central Otago Lakes 482,000 3.70 -9.90
NEW ZEALAND 459,500 -0.10 0.80%
Source: Real Estate Institute of New Zealand

Days to sell mostly down, except in Auckland

In Auckland, the number of days to sell rose to an average of 33 days in November 2015 from 31 days in the previous year. Properties are selling fastest in Otago Region, with a 25 days-to-sale average in November 2015 (down from 29 days in November 2014).  In Wellington, the median number of days-to-sale was 28 days, an improvement from 32 days last year.  Canterbury/Westland and Nelson/Marlborough followed, with the median days-to-sale at 29 days in November 2015.

Northland Region has the longest number of days to sell, at 44 days in November 2015, an improvement from 46 days the previous year. 

Property sales in NZ rising strongly, except in Auckland

Property sales in New Zealand rose 8.5% to 8,048 units in November 2015 compared to November

In November 2015:

  • In Auckland, sales were down by 14.7% from the previous year
  • In Wellington, sales were up 17.6% y-o-y
  • In Canterbury, sales were up 9.7% y-o-y
  • In Waikato/Bay of Plenty, sales surged 37.9% y-o-y

New Zealand property sales

Nationwide, sales of residential properties valued over US$1 million soared by 21% in November 2015 from a year ago.  Likewise, the total value of residential sales rose by 11.35% y-o-y to NZ$4.737 billion (US$3.18 billion), according to the REINZ.

“Demand is being driven by low interest rates and the relaxation of the LVR rules.... Increased listings are also improving choice for buyers,” said Milne.

Why recent muted prices, despite a strong market?

Aside from weak economic growth, “other influences on the market are the new IRD requirements, bank account changes and revised LVR restrictions,” said REINZ Chief Executive Colleen Milne.

“Understandably this has slowed down some purchase decisions while the implications of the new rules are absorbed, with a fall off in auction clearances the most prominent outworking of this," Milne added.

"The situation should revert as the market adjusts to the new operating environment and restrictions.”

New Zealand´s high house prices worry the RBNZ

During the previous housing boom from 2001 to 2007, house prices in New Zealand surged by almost 114% (82.6% inflation-adjusted), including 25% in 2003, 12.2% in 2004, 15.3% in 2005, 9.6% in 2006, and 8% in 2007. Big rises - but then, this was a period when the economy expanded by an average of 3.7% every year.

House prices started to fall in early 2008, but the decline was much less than in other countries:

  • In 2008, house prices fell 8.94% (-11.96% inflation-adjusted).
  • In 2009, house prices rose by 5.23% (+3.27% inflation-adjusted).
  • In 2010, house prices fell by 1.7% (-5.45% inflation-adjusted).
  • In 2011, house prices rose by 2.91% (+1.03% inflation-adjusted).
  • In 2012, house prices rose by 6.72% (+5.71% inflation-adjusted).
  • In 2013, house prices rose by 9.14% (+7.4% inflation-adjusted).
  • In 2014, house prices rose again by 6.35% (+5.86% inflation-adjusted)

One reason for strong house price rises from 2012 to 2014 was the rapid expansion of New Zealand’s economy, which grew by an annual average of 2.9%.

A second reason was low interest rates.

A third reason was high immigration.

Non-residents are generally allowed to buy houses in New Zealand. However, purchase of property does not give the buyer the right to live permanently in the country.

Since 2012 house prices have been zooming up, causing anxiety at the Reserve Bank of New Zealand (RBNZ), the country’s central bank. 

Are property prices too high?

New Zealand gdp per capita

New Zealand´s house prices have been estimated by Deutsche Bank to be 30% overvalued relative to income, and 82% overpriced relative to rents, with Auckland the worst outlier. 

However this assessment of overvaluation is contradicted by the Global Property Guide´s own research, which suggests that rental yields in New Zealand´s prime cities are reassuringly high by international standards, and that on this measure, New Zealand´s high residential property prices are amply justified (see below).

Rental yields are excellent in Auckland and Wellington, poor in Christchurch

For a developed economy like New Zealand, yields are exceptionally attractive.

New Zealand migration

In Auckland, rental yields on apartments range from 6.09% to 7.18%, according to Global Property Guide research conducted last August 2015.  The key to getting good yields is smaller apartments, which earn much more than large apartments.

And rental returns on apartments in Wellington have now moved ahead of Auckland. Rental yields ranged from 6.88% to 8.43% in August 2015, with smaller apartments earning more.

In Christchurch, rental returns on houses, which are usually lower than on apartments, range from 2.96% to 4.26% over the same period.

Inflation gdp inflation

Though average private rents have been generally rising modestly across the country, regional figures show mixed results. In Auckland, the average rent for new private tenancies rose by 6.4% to NZ488 (US$) in June 2015 from a year earlier, according to New Zealand’s Ministry of Business, Innovation and Employment. Over the same period, rents rose in the Wellington region by 4.3% y-o-y to an average of NZ395 (US$265) while rents dropped by 1.3% y-o-y to NZ411 (US$276). In the rest of New Zealand, rents stood at NZ302 (US$203) in June 2015, up by 3.9% from the previous year.

Across the various areas within Auckland, in June 2015:

  • In Central Auckland, the average rent was up 6.9% y-o-y to NZ$505 (US$339)
  • In Manukau, the average rent was up 5.3% from the previous year, NZ$465 (US$312)
  • In the North Shore, the average rent rose by 7% y-o-y to NZ$530 (US$356)
  • In Waitakere, the average rent rose by 6% y-o-y to NZ$441 (US$296)

Migration flows fuelling the housing market

New Zealand is again attracting large numbers of permanent and long-term migrants, because of healthy economic growth.

In the third quarter of 2015, total permanent and long-term arrivals were up by 11% to 32,695 people, from 29,468 people during the same period last year, according to Statistics New Zealand.

New Zealand’s net migration rose to 49,800 in 2014 - its highest-ever level - up from 19,500 in 2013.  The previous highest net inflow of permanent and long-term migrants was in 2002, with more than 38,000 migrants, followed by 35,000 in 2003 and 15,000 in 2004.

Net migration was just 3,800 in 2008, which was attributed to a weak economy and low employment opportunities. In 2009, net migration increased again to 21,300 but plunged to just 10,500 in 2010.

International migrant flows have a significant impact on house price movements and construction activity in New Zealand. The housing boom of the early-2000s was strongly associated with strong immigration.

In October 2015, total visitor arrivals increased by 8.2% y-o-y to 229,400 people, mainly due to more Chinese and Australian visitors.

New Zealand’s population is around 4.4 million, up from about 4 million recorded in the 2006 census. With a growth rate of 1% per year, its population is projected to reach 5 million by 2020.

Residential construction up

In 2014, residential construction activity was back at pre-crisis levels, with more than 24,700 new dwellings consents, up from almost 21,300 units in 2013, and 16,900 units in 2012. New dwellings authorized rose by 8.3% to 21,763 units during the first ten months of 2015 compared to the same period last year, according to the Statistics New Zealand (SNZ).

New Zealand dwellings authorized

Auckland accounted for 35% of total dwellings authorized and Canterbury for 25%.

Key interest rates falling

New Zealand interest rates

In December 10, 2015, the RBNZ cut the official cash rate (OCR) by another 25 basis points to its historic low of 2.50%, after cutting it three times this year (in June, July, and September 2015). The key rate is expected to remain unchanged until next year.

The average floating mortgage interest rate was 6% in October 2015, down from 6.6% a year earlier. The two-year fixed mortgage interest rate fell to 5.3% in October 2015, down from 6.3% in the same month last year.

It was in July 2008 that the RBNZ dramatically reversed gear and lowered interest rates, after a period of rising interest rates beginning in 2003. By April 2009 the key rate was down a record low 2.5%, where it remained until May 2010.

The RBNZ raised the key rate by 25 basis points in May 2010, and by another 25 basis points to 3% in July 2010. However in March 2011, the key rate was cut to 2.5% after the Christchurch quake of February 2011. The RBNZ left the OCR unchanged at 2.5% until February 2014. However in July 2014 the RBNZ increased the OCR to 3.5%.  Now the rate is back down again. 

Mortgage market expanding again

New residential mortgage loans rose by almost 20% y-o-y to NZ$5.85 billion (US$3.93 billion) in October 2015.

New Zealand housing loans

The mortgage market soared from just 55.6% of GDP in 1998, to 90.9% of GDP in 2009, but then fell back to 88.2% of GDP in 2o14.

Economy slowing

New Zealand exchange rate

New Zealand´s economy is expected to expand by a modest 2.2% this year and by another 2.4% in 2016, according to the IMF.  Economic growth was 3.3% in 2014, its strongest performance since 2007, after GDP growth of 2.5% in 2013, 2.9% in 2012 and 1.3% in 2011, according to the International Monetary Fund (IMF).

After the Asian financial crisis New Zealand experienced years of unbroken economic growth, boosted by strong personal consumption. The economy grew by an average of 3.8% per year from 1999 to 2007. 

During the recent global crisis the economy contracted only briefly and mildly - by 0.8% in 2008 and by another 1.6% in 2009. New Zealand emerged swiftly from recession, after only five quarters of negative GDP.

However now there are a few warning signs:

  • The Kiwi has depreciated against the surging US$ in recent months. The average monthly exchange rate stood at NZD 1=US$ 0.6567 in November 2015, from NZD 1=US$ 0.7832 in the previous year. The kiwi is expected to depreciate further until early-2016, due to falling dairy prices and strong U.S. economic growth.
  • Unemployment increased to 6% in the third quarter of 2015, from 5.9% in the previous quarter and 5.6% a year earlier, according to the RBNZ. From 2009 to 2012, New Zealand’s average unemployment rate was 6.5%.
  • The country’s current account deficit stood at 3.5% of GDP this year, up from 3.1% in 2014 and 3.2% in 2013 but down from 4% in 2012, according to Statistics New Zealand. 

The country is also expected to return to deficit this year, amidst slowing domestic economy and a decline in tax revenues. The operating deficit is estimated at NZ$401 million (US$272 million) in the year ending June 30, 2016, compared to a NZ$414 million (US$278 million) surplus a year earlier.

Not too much should be read into these.  New Zealand’s net external debt is low, at about 26.5% of GDP (2014-2015), though it increased to NZ$255.27 billion (US$171.49 billion) in Q2 2015 from NZ$247.18 billion (US$166.06 billion) the previous quarter.

Inflation was low at 0.4% in the third quarter of 2015, down from 1% a year ago and 4% in 2011, according to the RBNZ. From 2000 to 2010, inflation averaged 2.6% per year, according to the IMF.  


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