No end in sight for New Zealand's great house price boom
Lalaine C. Delmendo | February 24, 2021
When adjusted for inflation, house prices rose by 18.1% in 2020. And during the latest quarter (Q4 2020), house prices increased by 8.7%.
Auckland, which accounts for about 30% of total property sales in New Zealand, saw a strong house price growth of 17.4% during 2020.
The highest price increase was in West Coast, where prices surged by 50% during 2020, followed by Gisborne (43.9%), Manawatu/Wanganui (31.18%),Hawke's Bay (27.31%), Northland (25.23%), and Marlborough (20%). There were also double-digit house price hikes in Otago (19%), Wellington (18.58%), Waikato (16.88%), Canterbury (16.52%), Taranaki (16.28%), Southland (13.64%), Bay of Plenty (13.39%), Nelson (12.73%), and Tasman (12.21%).
Auckland has average prices of NZ$ 1,040,000 (US$ 739,603) - the country's most expensive - followed by Wellington, with an average price of NZ$ 812,251 (US$ 577,638), and Tasman, with an average price of NZ$ 735,000 (US$ 522,700).
The cheapest housing can be found in the West Coast, with an average price of NZ$ 285,000 (US$ 202,680), followed by Southland (NZ$ 375,000 or US$ 266,684), Taranaki (NZ$500,000 or US$355,578), and Manawatu/Wanganui (NZ$ 528,000 or US$ 375,491).
New Zealand saw spectacular house price rises of about 114% (82.5% inflation-adjusted) from 2001 to 2007. Then after a pause, there were nine further years of substantial price rises 2012-2020, supported by strong economic growth. Because of this, housing in New Zealand has become really expensive, for a country with such a small population relative to its landmass.
Despite the pandemic, demand remains very strong buoyed by very low interest rates. Property sales in New Zealand surged 36.6% to 8,935 units during the year to December 2020, according to the REINZ. In Auckland, the number of properties sold soared 66% y-o-y to 3,219 units over the same period.
The limited supply of homes in the market puts further pressure on prices. In December 2020, the number of properties available for sale fell by 29.1% y-o-y to 12,932 units – the lowest level of inventory since records began, according to REINZ.
Worse, the growth in construction activity is slowing, with the number of new dwelling consents rising by less than 3% y-o-y in the first eleven months of 2020, a sharp slowdown from an annual average growth of 14% in the past eight years, according to Statistics New Zealand.
“Currently we have half the inventory levels we had back in December 2018. Therefore, there just isn't enough choice for people looking to purchase which has meant that there is significant pressure being placed on house prices in most parts of the country,” said REINZ CEO Bindi Norwell. “When you add into the equation the fact that there are record low interest rates, it means that people are more willing to compete to secure the property they want.”
The median number of days to sell a house dropped to just 27 days in December 2020, down from 31 days in the same period last year and the shortest since 2003.
“This lack of choice and high levels of confidence is also causing properties to be sold at the quickest pace we've seen in 17 years,” Norwell noted.
New Zealand's economy was estimated to have contracted by 6.1% in 2020 due to the COVID-19 pandemic, according to the International Monetary Fund (IMF). This is in contrast to its robust economic performance in the past decade, with growth of 2.2% in 2019, 3.2% in 2018, 3.8% in 2017, 4.2% in 2016, 4.1% in 2015 and 3.2% in 2014.
The economy is expected to recover this year, with a growth forecast of 4.4%, based on IMF forecast.
Good rental returns in Wellington and Auckland
Last year, we found that the best rental returns available on apartments in Wellington had moved slightly ahead of Auckland. This may reflect a jump in prices of larger properties in Auckland, which would tend to reduce the rental returns. "Foreign buyers are mostly drawn to the Auckland area", explains Bill Sandston, a real estate lawyer.
In Wellington, the capital of New Zealand, rental yields on 1 and 2 bedroom houses are now around 5.5%. Apartments, and particularly smaller apartments, tend to earn more - last year we found returns of from 6.88% to 8.43%
In Auckland, last year we found that rental yields on apartments ranged from 6.09% to 7.18%.
Property transaction costs analysis in New Zealand are rather low, and in regional terms, the total costs of buying and then selling a property are very attractive.
Rental income tax is high in New Zealand
Rental Income: Rental income is taxed in New Zealand at progressive rates, from 10.5% to 33%.
Capital Gains: Capital gains are not normally taxed in New Zealand.
Inheritance: There is no estate duty payable in New Zealand.
Residents: Residents are taxed on their worldwide income at progressive rates, from 10.5% to 33%.
Buying costs are relatively low in New Zealand
Total transaction costs are relatively low at 4.23% to 4.80%, of which 3.5% to 4% (plus 15% GST) goes to the real estate agent as commission. The buyer pays the registration fees while the seller pays the agent's commission. Each party pays for their lawyers. There are no stamp duties. There are only two procedures needed to register a property and each procedure takes a day to complete.
Tenant protection laws are neutral in New Zealand
New Zealand law is neutral between landlord and tenant.
Tenancy Laws: The Residential Tenancies Act 1986 guarantees the rights of both parties and sets the parameters of their relationship.
Rent: Landlord and tenant can freely agree on the rent, and any increases are allowed provided that the landlord gives sufficient notice or there has been no rent increase over the last six months. A tenant can call upon a Tenancy Tribunal for rental assessment if he thinks the increase is excessive.
Pandemic hits NZ economyNew Zealand’s economy was estimated to have contracted by 6.1% in 2020 due to the pandemic, according to the International Monetary Fund (IMF), in contrast to its robust economic performance in the past decade, with growth of 2.2% in 2019, 3.2% in 2018, 3.8% in 2017, 4.2% in 2016, 4.1% in 2015 and 3.2% in 2014. After the Asian financial crisis New Zealand experienced years of unbroken economic growth, growing 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 0.4% in 2008. The economy grew slightly by 0.3% in 2009. New Zealand emerged swiftly from recession, after only five quarters of negative GDP.
The economy is expected to recover this year. Growth is forecast to be 4.4% by the IMF.
In May 2020, the government unveiled a record NZ$ 50 billion (US$ 35.6 billion) pandemic stimulus, on top of the initial NZ$ 12.1 billion (US$8.6 billion) package announced in March 2020. The package includes building 8,000 new homes to support the construction sector, spending NZ$4 billion to help struggling businesses, creating 11,000 jobs in environmental projects, and extending its current wage subsidy scheme.
As a result, the country is estimated to record a deficit of NZ$ 28 billion (US$ 19.9 billion), equivalent to about 9.6% of GDP in 2020, in sharp contrast to last year’s NZ$7.4 billion (US$ 5.3 billion) surplus. In 2021, deficit is projected to reach NZ$ 29.6 billion (US$ 21.1 billion).
New Zealand’s general government gross debt surged to 48% of GDP in 2020, sharply up from the prior year’s 31.5% and the highest level seen since 1994, according to the IMF.
Unemployment stood at 5.3% in Q3 2020, up from 4.2% in the previous year and the highest in five years, according to the Statistics New Zealand. There were about 151,000 unemployed people in Q3 2020 as the COVID-19 crisis hit the labor market.
Inflation was 1.4% during the year to Q3 2020, slightly down from 1.5% a year ago. The current inflation is within the RBNZ’s target range of 1% to 3% for 2020.
NZ Prime Minister JacindaArdernwon a second term in office in a landslide victory during the October 2020 general elections. Arderncampaigned on various social issues including housing affordability and homelessness, improved healthcare, and child poverty. She won praise internationally for her handling of two major crises – the 2019 Christchurch mosque shooting, and the 2020 COVID-19 outbreak.