Housing bubble expected to spread

As Auckland house prices soar, a study says New Zealand’s other main centres will soon follow suit – especially while interest rates remain low. David Lomas reports.

HOMEOWNERS ACROSS the country can expect to see rising value to their homes as surging Auckland property prices spread, a new study claims.

An Auckland University study predicts the property bubble that has seen prices skyrocket will impact on the rest of New Zealand, especially Wellington, Christchurch, Hamilton and Tauranga.

Auckland’s house prices hit an all- time high this week, with homes selling at an average of just under $810,000, up nearly 50 per cent from $414,355 at the peak of the last property boom in 2007.

How high prices rise will depend on the income of regional buyers and the ability of people to pay rent, report author Ryan Greenaway-McGrevy said.

The regional rise was not expected to be ‘‘as massive a price increase as there has been in Auckland’’, the economist said.

The Auckland effect is likely to be further encouraged in other centres by the expectation that interest rates would remain at less than 6 per cent, down from the historically traditional rate of about 8 per cent.

Greenaway-McGrevy and fellow researcher Peter Phillips have found that Auckland is in the midst of a housing ‘‘bubble’’ similar to the 2003-2007 bubble that ended with the global financial crisis.

The 2007 Auckland bubble ‘‘was followed by successive bubbles in Christchurch, Hamilton, and the other territorial authorities that comprise the Auckland metro area’’, said Greenaway-McGrevy.

While the Auckland bubble ‘‘has not migrated to the other main centres’’, researchers said it would soon be expected ‘‘to affect property prices in other regions.’’

The projected bubble may already be hitting the Hamilton property market.

Jeremy O’Rourke, managing director of Hamilton’s Lodge Real Estate, said increasing demand from the Auckland market was starting to affect prices.

He said houses in the $300,000 – $ 380,000 range were being targeted. Three groups were involved. Young people who could not afford Auckland prices were buying in Hamilton but renting in Auckland where they worked. Migrants were moving out of Auckland after a year or two in New Zealand. And set income earners like teachers were seeking to live in more affordable cities.

While the new Hamilton buyers were a small group, they were changing the market and the ‘‘trend suggests Hamilton is ready to go through a dramatic price rise’’, O’Rourke said.

However, realestate.co.nz chief executive Brendon Skipper said it was unlikely the Auckland bubble would be repeated nationwide.

He said Auckland attracted most of the country’s new immigrants and that, coupled with a short housing supply, was pushing up prices.

‘‘Other cities do not have that demand,’’ he said.

House prices in Auckland rose 14.6 per cent in the last year, including a 4.3 per cent rise in the last three months.

The current Auckland bubble started in late 2013, according to the researchers.

Greenaway- McGrevy said bubbles generally lasted for between three and five years.

A housing bubble occurs when there is an accelerating growth in real estate prices without a commensurate increase in the underlying fundamental value, Greenaway- McGrevy said. The bubble ends when the ability of people to buy or rent properties is compromised.

‘‘ Eventually, at some point, economic fundamentals limit the degree to which people can pay for property,’’ he said. Income was the biggest factor. ‘‘If it becomes hard for people to rent or purchase a property in Auckland then you will begin to see demand for housing in Auckland tail off,’’ he said.

In Auckland that point has not been reached.

‘‘Buyers are wary of being priced out by further increases in prices so, as a result, seem to be willing to pay premiums to secure properties,’’ said Quotable Value’s Auckland valuer James Wilson said.

‘‘Investors are still very active in the market, capitalising on low interest rates, high equity across their portfolios and rapidly rising prices.’’

In 2007 the bursting bubble led to house price falls of 9 to 11 per cent across the Auckland cities, 8 per cent in Wellington, 10 per cent in Christchurch and 12 per cent in Hamilton.

While Auckland prices have surged during the bubble, prices in other centres have had little recent movement.

‘‘Auckland is currently the sole driver of the New Zealand price index in the NZ property market and it has been for all of 2015,’’ said Core Logic’s senior research property analyst Nick Goodall.

‘‘ Previously Christchurch was also a significant driver of the New Zealand property market but it has since levelled off and the other main centres are relatively flat of slightly increasing.

The Dunedin and Christchurch markets were currently flat while ‘‘Hamilton has increased a little bit but it is pretty modest’’, he said.

Auckland’s current median house price of $ 675,000 is 7.86 times the median household income of $85,865.

Nationwide the property price to income ratio was 5.2, a bigger differential than the United States, Canada, the United Kingdom, Ireland, Japan and Singapore.

The researchers said policy makers should be concerned as massive disparities like those seen in Auckland had ‘‘ major intergenerational wealth effects, reducing the relative wealth and welfare of younger generations, renters, and first- time home buyers in relation to extant property owners’’.

The reliance on highly leveraged mortgages made New Zealand’s wider financial stability susceptible to housing market downturns, they warned.