New Zealand’s house price boom is over
Lalaine C. Delmendo | March 04, 2019
New Zealand’s housing market is cooling rapidly, with house price growth slowing to its weakest pace in seven years. During 2018, the nationwide median house price rose by just 1.5% to NZ$560,000 (US$381,847), according to the Real Estate Institute of New Zealand (REINZ), a sharp slowdown from year-on-year rises of 6.28% in 2017, 13.85% in 2016 and 11.49% in 2015.
When adjusted for inflation, house prices actually declined by 0.4% in 2018 from a year earlier. And during the latest quarter, house prices increased a meagre 0.72% (0.61% inflation-adjusted).
Why the reversal? A ban on buying by non-resident foreigners was recently introduced. Days-on-market are rising. Construction activity has been continuously increasing in the past seven years. And, frankly, house prices have become very high - especially in Auckland.
Auckland, which accounts for about 25% of total property sales in New Zealand, saw almost no price movement in 2018 from the previous year. Moreover, very minimal house price growth was registered in Waikato (1.2%), Southland (1.4%), and Bay of Plenty (2%).
The highest price increase was recorded in the West Coast, with prices surging by 18.4% during 2018. Double digit house price hikes were also observed in Nelson/Marlborough/Tasman (16.8%), Gisborne (15%), and Manawatu/Wanganui (11.7%).
Strong to modest house price rises were seen in Hawke’s Bay (9.3%), Northland (9.1%), Taranaki (8.6%), Wellington (8.1%), Otago (7.5%) and Canterbury (4.6%).
Auckland has average prices of NZ$ 862,000 (US$ 587,772) - the country’s most expensive - followed by Bay of Plenty, with an average price of NZ$ 610,000 (US$ 415,941), and Wellington, with an average price of NZ$ 605,000 (US$ 412,872).
The cheapest housing can be found in West Coast, with an average price of NZ$ 219,000 (US$ 149,330), followed by Southland (NZ$ 250,000 or US$ 170,468), Manawatu/Wanganui (NZ$ 320,000 or US$ 218,198), and Gisborne (NZ$ 338,000 or US$ 230,472).
MEDIAN PRICES BY REGION, 2018
|Regions||Median price||m-o-m change||y-o-y change|
|Bay of Plenty||610,000||415,941||3.40||2.00|
|Sources: Real Estate Institute of New Zealand (REINZ), Global Property Guide|
New Zealand saw spectacular house price rises of about 114% (82.6% inflation-adjusted) from 2001 to 2007. Then after a pause, there were six further years of substantial price rises 2012-2017, 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.
New Zealand’s economy expanded by over 3% in 2018, according to the International Monetary Fund (IMF). For the last four years, the economy’s performance has been the strongest since 2007, with growth of 3% in 2017, 4.1% in 2016, 4.2% in 2015 and 3.2% in 2014. The economy is projected to grow further by 3% this year and by another 3.1% in 2020.
The ban on foreign homebuyers - wise or unwise?
The results of these price pressures are clear. Around 40,000 people in New Zealand, or 1% of the population, are living on the streets or in emergency accommodation, according to a Yale University study published in July. This is the highest rate of homelessness in any developed country.
In recent years buying tours by Chinese speculative buyers have caused concern. The issue dominated the October 2017 elections, which saw Labour prime minister Jacinda Ardern ending nine years of government by the conservative National Party. The new government took over the previous government’s plans to introduce legislation to ban foreigners from buying homes in New Zealand.
In August 2018, the parliament finally passed the Overseas Investment Amendment Act, effective in October, prohibiting non-resident foreigners from buying existing homes in the country. There are some exceptions, though. Foreigners with NZ residency status are still allowed to buy houses, as well people from Australia and Singapore, due to existing free-trade agreements. Foreigners who already own homes in NZ are also not affected by the new law.
Recently, the IMF urged the NZ government to reconsider the ban, as it is unlikely to improve housing affordability in the country. It also warned the move could discourage foreign investment needed to build new homes.
“Is the ban wise or useful? We think it’s neither,” said Dave Platter of Chinese real estate portal Juwai.com. “Foreign buying…tends to be focused on new development, making clear again that foreign investment leads to the creation of new dwellings. That’s vital in a market with a housing shortage, like Auckland.”
Nationwide, foreign homebuyers account for just 3% of total property sales. However, in central Auckland and the southern scenic hot spot of Queenstown, foreigners account for about 22% and 5% of total sales, respectively.
Demand is falling sharply
Property sales in New Zealand declined by 12.9% to 5,330 units during the year to December 2018, according to the REINZ.
“While December is usually a quiet month as people focus on Christmas holidays, December 2018 was extremely quiet with the lowest number of properties sold for the month of December for seven years,” said Bindi Norwell, Chief Executive at REINZ. “Additionally, 12 out of 16 regions saw an annual decrease in the number of properties sold.”
Nationwide, the number of days-on-market rose by three days to 35 days in December 2018 from a year ago, according to the REINZ.
Auckland saw the biggest annual decline in property sales, falling by 24.3% to just 1,336 units in December 2018, followed by Taranaki (-23%), Wellington (-16.2%), Otago (-14.6%), Southland (-13.4%), and Northland (-10.3%). Sales also declined in Canterbury (-7.6%), Bay of Plenty (-7.1%), Manawatu/Wanganui (-5.6%), and Waikato (-4.6%).
In contrast, the highest sales growth was recorded in the West Coast, with the number of properties sold surging by 42.9% during the year to December 2018. Strong sales increases were also observed in Tasman (29.4%), Gisborne (15.2%) and Hawke’s Bay (7.2%).
The number of properties available for sale in New Zealand fell slightly by 1.8% to 24,158 units in December 2018 from a year earlier.
Residential construction boom continues
In 2018, the total number of new dwelling consents in New Zealand rose by 6.1% y-o-y to almost 33,000 units, according to Statistics New Zealand, after annual increases of 3.4% in 2017, 10.8% in 2016, 9.8% in 2015, 16.1% in 2014, 25.8% in 2013 and 23.9% in 2012.
However, there are wide regional variations.
- In Auckland, which accounted for the highest share of the total number of new dwellings authorized in New Zealand, consents were up 18% y-o-y to 12,862 units in 2018.
- In Waikato, consents rose by 6.7% y-o-y to 3,742 units in 2018
- In Wellington, consents surged 19% y-o-y to 2,731 units in 2018
- In Canterbury, consents fell by 4.7% y-o-y to 4,769 units in 2018
- In the rest of North Island, consents fell by 6.3% y-o-y to 5,521 units
- In the rest of South Island, consents were down by 4.4% to 3,363 units in 2018 from a year earlier
The value of new dwelling consents also increased 6.1% y-o-y to NZ$12.18 billion (US$8.3 billion) in 2018.
Total dwelling stock in New Zealand rose by 1.5% to 1,884,200 units in 2018 from a year earlier, according to Statistics New Zealand. More than 62% of which were owner-occupied while 34% were rented. The remaining 4% were provided for free.
A short history of New Zealand’s housing boom
House prices in New Zealand surged by almost 114% (82.5% inflation-adjusted) during the previous housing boom from 2001 to 2007, including 24.8% in 2003, 12.2% in 2004, 15.3% in 2005, 9.7% in 2006, and 8% in 2007. Big rises - but then, this was a period when the economy expanded by an average of 3.6% every year.
House prices started to fall in early 2008, but the decline was much less than in other countries. After falling by 8.95% in 2008, house prices rose by 5.42% in 2009 – but only to fall again by 1.67% in 2010.
Supported by healthy economic fundamentals, the housing market started to recover in 2011, registering a modest house price growth of 2.82%. New Zealand saw another housing boom in the following years, with prices soaring by 67.4% (57.1% inflation-adjusted) from 2011 to 2017, including double-digit price rises in 2015 (11.49%) and 2016 (13.85%).
HOUSE PRICE INDEX, ANNUAL CHANGE (%)
|Sources: RBNZ, REINZ, Global Property Guide|
Immigration and the housing market
One reason for strong house price rises has been the healthy expansion of New Zealand’s economy.
A second reason was low interest rates.
A third reason was high immigration.
New Zealand’s net immigration was 70,016 people in 2017, a slight decline from a peak of 70,588 in 2016. However, it was far higher than 64,930 in 2015, 50,922 in 2014, and 22,468 in 2013. From 2005 to 2012, the country’s net immigration averaged only 7,446 people every year, because of the weak economy and low employment opportunities. In contrast, net permanent and long-term immigration was more than 38,000 people 2002, 35,000 in 2003 and 15,000 in 2004.
In the first ten months of 2018, net migrants fell by 14.1% to 50,339 people compared to the same period last year, according to Statistics New Zealand.
International migrant flows have a significant impact on house price movements and construction activity in New Zealand. The housing boom of the early-2000s including the strong house price rises from 2012 to 2017 were strongly associated with strong immigration.
Are property prices too high? Maybe not - yields are good.
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.
New Zealand, particularly Auckland, was rated as "severely unaffordable" with a median multiple of 9.0, according to the 15th Annual Demographia International Housing Affordability Survey: 2019. Among the eight developed nations covered by the survey, New Zealand was ranked second most unaffordable major housing market in 2018.
The Demographia survey uses the Median Multiple to assess housing affordability in 309 metropolitan housing markets in Australia, Canada, China (Hong Kong), Ireland, Singapore, New Zealand, the United Kingdom, and the United States. The Median Multiple follows this formula: Median Multiple = median house prices / median household income. A median multiple of 3.0 and below is considered affordable.
However these assessments of overvaluation and severe unaffordability are 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 very good in Auckland and Wellington, poor in Christchurch
For a developed economy, yields in New Zealand are attractive.
In Auckland, rental yields on apartments range from 6.09% to 7.18%, according to Global Property Guide research. 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%, 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%.
Rents continue to rise
Nationwide, the average rent for private residences reached an all-time high of NZS 495 (US$ 338) per week during the year to January 2019 – up by 5.3% from a year earlier, according to TradeMeProperty. This was supported by Statistics New Zealand, which showed that the national rental price index increased 4.7% y-o-y in January 2019.
Wellington City is now the most expensive city in New Zealand to rent after its median weekly rent climbed 8.2% y-o-y to reach an all-time high of NZ$ 595 (US$407), according to Trade Me Rental Price Index. It was followed by Auckland with median rent of NZ$ 555 (US$379) per week.
“It’s a simple supply and demand equation – the supply around Wellington is just not keeping up and it’s even tougher at this time of year as students move back for the university year and ramp the demand up further,” said Trade Me’s Head of Rentals Aaron Clancy.
Regionally, Manawatu/Wanganui registered the biggest growth in residential rents of 16.7% during the year to January 2019, followed by Taranaki (11.4%), Hawke’s Bay (10.5%), Wellington (10%), Otago (8.3%) and Waikato (7.5%). More modest rent increases were also seen in Southland (5.6%), Bay of Plenty (5.6%), Nelson/Tasman (4.9%), West Coast (4.1%), Auckland (2.8%), and Northland (2.6%). Rents were almost unchanged in Marlborough and Canterbury.
Mortgage interest rates remain low
During its most recent meeting in February 2019, the RBNZ decided to keep the Official Cash Rate (OCR) unchanged from the historic low of 1.75% at which it has been since November 2016. That’s because while unemployment is already near its maximum sustainable level, inflation remains below the central bank’s 2% target, said the RBNZ.
So residential mortgage interest rates remained almost steady. In January 2019:
- Floating mortgage rate: 5.77%, slightly up from last year’s 5.75%
- 6 months initial rate fixation (IRF): 5.1%, unchanged from the previous year
- 1 year IRF: 4.75%, down from 4.88% a year earlier
- 2 years IRF: 4.93%, slightly down from 5.08% a year earlier
- 3 years IRF: 5.07%, down from 5.3% a year earlier
- 4 years IRF: 5.4%, down from 5.7% a year earlier
- 5 years IRF: 5.58%, down from 5.91% a year earlier
Mortgage market continues to expand
New Zealand’s mortgage market has ballooned to 86.7% of GDP in 2018, up from just 51.4% of GDP in 1998. In December 2018, the total value of outstanding housing loans rose by 5.7% y-o-y to about NZ$ 257 billion (US$ 175.1 billion), according to the RBNZ.
In 2018, the total value of new residential mortgage lending rose by 8.9% to NZ$64.3 billion (US$43.8 billion) from a year earlier. Loans drawn by first time homebuyers, which accounts for about 16% of new residential mortgage loans, surged 23.7% y-o-y in 2018.
RBNZ eases LVR restrictions again
Tighter bank lending restrictions to residential property buyers were implemented by the Reserve Bank of New Zealand (RBNZ) in October 2016, in an effort to curb house price growth and discourage speculative buying. Under new Loan to Value Ratio (LVR) rules banks should generally require owner-occupiers to have a 20% deposit for a mortgage loan. Residential property investors should have a 40% deposit.
Although banks are still allowed to lend mortgage loans with smaller deposits, they can only do so up to a certain limit.
In November 2017, RBNZ Governor Grant Spencer noted that these measures had dampened the rapid house price hikes. Therefore, the Reserve Bank decided to modestly ease the LVR restrictions starting January 1, 2018:
- From 10% of each bank’s total lending to owner-occupiers, the limit for borrowers with a deposit of less than 20% was raised to 15%.
- No more than 5% of each bank’s new mortgage lending to residential property investors can be at LVRs of more than 65% (up from an earlier LVR of 60%).
As house price growth continue to ease and demand fall, the RBNZ decided recently to ease its LVR restrictions further. Starting January 1, 2019, the limit for borrowers with a deposit of less than 20% was raised from 15% to 20% of a bank’s total lending to owner-occupiers. In addition, the central bank also relaxed the conditions on new mortgage loans to property investors, with 5% of new mortgage loans able to have deposits of less than 30%, down from 35%.
Robust economic growth; healthy government finances
New Zealand’s economy expanded by over 3% in 2018, according the IMF. For the last four years, the economy’s performance has been very strong, with growth of 3% in 2017, 4.1% in 2016, 4.2% in 2015 and 3.2% in 2014.
After the Asian financial crisis New Zealand experienced years of unbroken economic growth. 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 0.4% 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 projected to grow further by 3% this year and by another 3.1% in 2020, according to the IMF.
The government recorded a surplus of NZ$ 5.5 billion (US$3.75 billion) in the 2018 fiscal year, up by NZ$ 1.4 billion (US$ 0.95 billion) from the previous year, according to the Treasury. This was a little below 2% of GDP in 2018.
New Zealand’s net external debt continues to fall, at around 19.9% of GDP in the 2017-18 fiscal year, a decline from 22.2% in 2016-17 and 24.4% in 2015-16.
Unemployment stood at 4.3% in Q4 2018, up from 4% in the previous quarter but down from 4.5% a year earlier, according to the Statistics New Zealand. There were about 120,000 unemployed people in Q4 2018.
Inflation was up by 1.9% during the year to Q4 2018, unchanged from the previous quarter but down from 1.6% a year ago. The current inflation is within the RBNZ’s target range of 1% to 3% for 2018.
- New Zealand bans sales of homes to foreigners (BBC News): https://www.bbc.com/news/world-asia-45199034
- 15th Annual Demographia International Housing Affordability Survey: 2019 (Demographia): http://www.demographia.com/dhi.pdf
- World Economic Outlook Database October
- 2018 (International Monetary Fund): https://www.imf.org/external/pubs/ft/weo/2018/02/weodata/index.aspx
- Official Cash Rate unchanged at 1.75% percent (Reserve Bank of New Zealand): https://www.rbnz.govt.nz/news/2019/02/official-cash-rate-unchanged-at-1-75-percent
- New residential mortgage standard interest rates – B20 (Reserve Bank of New Zealand): https://www.rbnz.govt.nz/statistics/b20-new-customer-average-rate
- Housing – M10 (Reserve Bank of New Zealand): https://www.rbnz.govt.nz/statistics/m10
- New Zealand passes ban on foreign homebuyers into law (Reuters): https://www.reuters.com/article/us-newzealand-politics-housing/new-zealand-passes-ban-on-foreign-homebuyers-into-law-idUSKBN1L00KO
- Building consents issued: December 2018 (Statistics New Zealand): https://www.stats.govt.nz/information-releases/building-consents-issued-december-2018
- New homes consented reach 14-year high(Statistics New Zealand): https://www.stats.govt.nz/news/new-homes-consented-reach-14-year-high
- Unemployment rate (Statistics New Zealand): https://www.stats.govt.nz/indicators/unemployment-rate
- Rental price indexes: January 2019 (Statistics New Zealand): https://www.stats.govt.nz/information-releases/rental-price-indexes-january-2019
- Consumers price index (CPI) (Statistics New Zealand): https://www.stats.govt.nz/indicators/consumers-price-index-cpi
- Government’s surplus grows so substantially it hits 2022 debt target early (Stuff): https://www.stuff.co.nz/business/107702066/governments-surplus-grows-so-substantially-it-hits-2022-debt-target-early
- New Zealand ban on foreign home buyers begins amid doubts it will ease crisis (The Guardian): https://www.theguardian.com/world/2018/oct/22/new-zealand-ban-on-foreign-home-buyers-begins-amid-doubts-it-will-ease-crisis
- Monthly Economic Indicators November 2018 (The Treasury): https://treasury.govt.nz/sites/default/files/2018-12/mei-nov18.pdf
- Wellington rents $45 more per week than Auckland (TradeMe Property): https://property.trademe.co.nz/market-insights/rental-price-index/wellington-rents-45-more-per-week-than-auckland/
- New Zealand’s house price rises are decelerating. But for how long? - December 08, 2016
- The New Zealand puzzle: low population, high property prices (and high rents) - January 02, 2016