Hot property can burn
This week, Martin Hawes answers a reader’s question.
QI am a property investor, not Auckland, but I cannot work out why the Auckland market continues on its rampant march. The maths don’t stack up.
AYou are right – the numbers do not stack up. House prices are very high and income yields (the rent as a percentage of the value of a property) are minuscule.
Most Auckland property ‘‘investors’’ are really speculators. The difference between an investor and a speculator is that investors are principally concerned with the income they can get, whereas speculators are simply buying for price changes. When the market turns, it is the speculators who are hardest hit: investors who have bought well still have good income from their investment, whereas speculators are left with a declining asset and not much else.
As you say, for investors like you, the numbers just do not stack up: Auckland is for those prepared to speculate on continuing price growth, not those looking for investment income.
To understand why Auckland property continues its ‘‘rampant march’’ consider two main things:
First, there probably is something of a housing shortage in Auckland. This is not universally accepted: some say that if there was a real housing shortage we would witness a major increase in rents as well as house prices.
In fact, rent increases in Auckland have been relatively subdued: house prices have risen 15 per cent in the last year, rents have increased only 7 per cent.
I live in Queenstown and over the last year our housing shortage has seen rents rise about 20 per cent while house prices have risen by 22 per cent. When you have an extreme house shortage, both house prices and rents rise.
Nevertheless, with high immigration, demand in Auckland has risen.
The second thing happening in Auckland is a speculative frenzy. Like sharks at the smell of blood, calm, rational judgment is absent with the prospect of prey. There are plenty of stories of auction bidders who just keep their hands up, prepared to pay any price. To many, Auckland property seems like a one-way bet.
When markets get to this speculative-frenzy stage they take on a life of their own. A bubble inflates with higher prices attracting a flood of money which drives the market ever higher.
Asset price bubbles have four main markers: first, asset prices lose touch with intrinsic value (Auckland house prices are overvalued). Second, bubbles always attract a lot of media attention. Third, bubbles inflate in times of cheap and easy credit. Fourth, bubbles always end in a crash (we cannot be sure that it was a bubble until we know how it ends).
I fear the longer Auckland house prices continue to rise, the greater the chance of a bad ending. As an investor, I would never speculate on a market which has lost touch with intrinsic investment value.