Don’t expect a slam-dunk end to rising house prices
At the start of the Covid-19 crisis market forecasts were grim - but after lockdown Kiwis went on a house-buying spree
Reviewing the housing market’s year in Covid, three sales stand out to me. The first took place on April 1, at the start of the lockdown. The auction of a two-bed Auckland home was conducted online and was a sign of things to come, with the real estate industry embracing new methods to keep the market alive. Online auctions, and remote veiwings, are now standard practice.
The second sale that caught my attention was that of a three-bedroom brick and tile home, just after the country moved to Level 2 restrictions in May. People had been lining up on the street for the open homes, and it fetched $1.6 million - more than $300,000 above RV - at a packed auction. That sale showed Kiwis were shrugging off economic concerns and were prepared to buy.
The third sale was of a 1477sqm property in Otara, South Auckland, in October. Investors snapped it up for $1.1 million - a record for an area that was previosuly seen as affordable. That sale, more than any, showed the extent of the boom and investors’ part in it.
How will the market fare in 2021? Read on to find out.
House prices have risen around the country at an especially strong rate in recent months, with high numbers of sales and shortages of stock on the market. How has this situation arisen during a global pandemic and can we reasonably expect it will continue through 2021?
A year ago, we all expected that the Covid-19 pandemic and lockdown would produce recession, high unemployment, and house prices falling anywhere between 5 per cent and 15 per cent. For a while house prices did fall, but only by just over 3 per cent during lockdown.
The economy did also shrink, but the 11 per cent fall in the June quarter was more than reversed by the 14 per cent rise in the September quarter. And unemployment did rise, but only from 4 per cent to a peak of 5.3 per cent and now it sits at a lower rate of just 4.9 per cent.
We can put the strength in the economy and resulting strength in the housing market down to a large number of factors. In no particular order or importance, here are a few of them.
1. We Kiwis were going to spend $10 billion on overseas travel. Being unable to we have instead spent those funds within New Zealand on spas, motorbikes, kayaks, shares, and property.
2. Interest rates were at record lows heading into lockdown and the housing market was accelerating, with average Auckland prices ahead over 3 per cent during the March quarter last year. With rates cut even further from March, bank depositors have been taking out funds now going backwards 1 per cent - 1.5 per cent a year after tax and inflation and placed some of that money into property. Borrowers have been able to access rates sometimes below 2 per cent, most commonly just under 2.5 per cent. 3.LVRs (loan to value ratios) were removed, so many more people found their deposits could stretch to purchasing a property.
4. First home buyers saw their deposits grow firmly during lockdown as they kept earning subsidised wages yet were unable to spend those earnings.
5. Expectations of being unable to travel encouraged many people to change their plans from 2-3 years of travelling then buying a property to purchasing a property with travelling to be done once the borders reopen.
6. Shortages of labour meant most businesses were reluctant to lay off staff and have been quick to seek new people since the economic upturn became evident.
7. We went into the lockdown with listings down more than 60 per cent from a year earlier. That shortage has worsened, especially as vendors worried about not being able to buy quicky have been looking to make a purchase before they list their property – thus aggravating the listings shortage.
8. The household sector went into lockdown with low debt growth in recent years and low levels of risky debt because of LVRs in place from 2013 and banks applying high test interest rates for debt-servicing purposes.
9. Expectations of expats returning and foreigners eager to shift here once the borders reopen has incentivised Kiwis to make a purchase now before those people reach our shores – and some Kiwis overseas have been buying sight unseen while waiting to gain entry. 10. Momentum - meaning that rising prices tend to encourage expectations of further price rises in asset markets (think Bitcoin, Tesla shares). FOMO – fear of missing out on those rises drives people to buy sooner rather than later. Their buying pushes prices higher, they feel vindicated, they perhaps seek to purchase more while others holding out for price weakness give in and join them.
Can the surge in prices generated by these many factors continue? No. But come the end of this year prices do look like they will still be rising at a 10 per cent pace if not more. This will be especially so in Auckland which only reengaged with the upward leg of its house price cycle at the start of 2020.
That is a key reason why the reimposition of the 40 per cent minimum deposit requirement for investors will not have the same impact as back in July 2016. In that earlier year Auckland was overdue for a pause, having experienced strongly rising prices for four years. The rest of the country was still catching up.
Nonetheless, the return of a 40 per cent LVR will be one factor encouraging a slowing in the pace of price rises during 2021. Another factor will be the anticipation of borders reopening slowly causing people to shift their plans away from housing and back toward travelling, or at least putting money aside for that eventual travelling.
History also tells us that in all price cycles, just as reluctant buyers eventually capitulate and dive in, so eventually do hesitant vendors eventually feel prices may be as good as they are going to reasonably get, and they list their properties. In particular, vendors holding out for prices 30 per cent above valuation eventually ease off and accept prices just 10-20 per cent over. Some investors also start selling properties which might need some extra maintenance.
Higher prices also, eventually, discourage buyers and encourage more vendors generally. It pays to note for instance that although stocks of listings are low, in January new listing numbers were around 15 per cent higher than those received in January 2020. There are properties being advanced for sale, and it will not take much of an easing in demand for stocks to start rising again – which will encourage the capitulation of sellers noted above.
The Government has also made it clear that there are some extra measures coming aimed at boosting supply and curtailing demand. History tells us that such measures outside those initiated by the Reserve Bank don’t tend to have strong shortterm impacts. Nonetheless, if the messaging is good enough, some calming can be expected.
There are no slam-dunk factors suggesting an ending of house price rises in the near future. But all cycles eventually turn, and all emergency-type effects eventually fade. 2021 is likely to be a story of many of this past year’s unusual factors easing off in strength and producing a slowing of average house price growth all around the country.
The reimposition of the 40 per cent minimum deposit requirement for investors will not have the same impact as back in 2016.
• Christchurch, the worst performer before the lockdown, has enjoyed a post-Covid resurgence in its housing market, with first home buyers particularly strong.
• Queenstown Lakes is no longer bleeding but growth is slow.
• Dunedin’s strong run before Covid struck has spluttered post-Covid. It is second-worst performing major metro – seeing growth of just 9.5% since March 25, 2020. In the lead-up to the pandemic it was the best performing major metro, enjoying median value growth of 23.4% (number two and number three – Wellington and Hamilton – were way behind with 8.2% growth). This is likely the result of low listings and vendor reluctance driven by fear they have no home to move to if they sell.
Too hot for some
Lesley Harris, from the First Home Buyers Club, says her members are absolutely the losers in this market of spiralling house prices.
“You require more deposit, you require more lending, so the flow-on effect is it becomes more out of reach for first-home buyers. If you’re buying in the same market it’s six of one, half a dozen of the other but, if you’ve got out of the market or you’ve yet to get on to the bandwagon, they’re the people that are going to be suffering from any increases.”
Mortgage broker John Bolton, owner of Squirrel mortgage company, says anyone who has stayed in the market has been a winner and that people who purchased last year are probably now feeling pretty lucky.
Other big winners are people who have been lucky enough to have won the ballot for a KiwiBuild home. “If you were to win the ballot, that’s amazingly good value for money. You’re buying a threebedroom terrace house or apartment for $650,000 in Auckland and these things would have market values of close to $800,000 so you really are getting a massive leg-up with KiwiBuild at the moment,” he says.
Other first-home buyers, however, are facing a tough market to get into, although Bolton says there will be a lot of new builds coming on to the Auckland market soon which might help.
“You’ve seen it with the spike in building consents over the last six months. I’m aware of a lot of development stock that will be coming to market this year and that’s exciting.
“I think for a first-home buyer realistically a lot of the existing stock is just too expensive for them now but this is where maybe a lot of this new build activity and buying offplan could be a really good option — maybe some other winners are people who bought off-plan a year ago so they’ve got newly completed properties coming into fruition, where they’ve probably had a decent lift in value.”
As far as locations which have done well post-Covid go, Bolton says “everywhere. The whole country seems pretty strong at the moment.”
Adam Thomson, director of Ray White Manukau, says in his patch, among those who have benefited most from the price boom are neighbours who have got together to sell properties.
This is such a good strategy he has adapted the way he is marketing property, saying if someone decides to list and has a bit of land, he will door-knock neighbours who also have a bit of land to see if they also want to sell.
That way, both parties make a lot more money from the competition between hungry developers who want to build terrace houses on the sections.
“If you ask, ‘Who’s been the winners?’ it’s been people with larger blocks of land — and by large, I just mean 800, 800, 1000, 1200sq m. We’ve probably seen 20 to 30 per cent growth on those in the last six months.
“People have really clicked on to what the new [Auckland Unitary] plan allows and they’re saying, ‘Well, we thought we could only put three on these sites but we can put six on so they’re worth a lot more than we thought.’”
Buyers either want to develop the land now or save it for later and when neighbours do team up they are fetching sometimes 20 to 40 per cent more than they would if they sold separately.
Thomson says a lot of buyers are looking at the future and thinking about not just buying their first property but their second or third, telling investors, for example, “If you bought this now you could put your second one on it and then your third.”
He says, “It’s quite a good strategy, I think, for an investor if they’re looking down the line.”
Developer buyers might be some of the big players, who have contracts with the likes of Kainga Ora, smaller companies or more inexperienced individual players. “There are people that are doing it to build and sell as new homes like a business and there are other people building them to rent as an investment; and there are a few people who have moved from investing in a property to wanting to do a bit more and develop.”
Others who have benefited from the boom are developers who had been at the end stage of a subdivision or property last year who may have been thinking each home would fetch around $800,000 to $900,000 only to find the home selling now for more than $1m.
People who panicked and sold when Covid first hit haven’t done so well, he says, nor have those who waited to buy.
He remembers taking calls from people nearly a year ago saying they were going to wait to buy until after the wage subsidy ran out in the hope they would pick up a bargain from people forced to sell but that didn’t happen and now those buyers are having to pay 20 per cent more.
Agents from other parts of the country say it’s hard to define who are the winners and losers in the current market because there are people missing out in every price bracket.
David Platt, managing director of Tommy’s Real Estate in Wellington, says the market in the capital is still running hot and each property listed is receiving
“You require more deposit, you require more lending, so the flow-on effect is it becomes more out of reach for first-home buyers. They’re the people that are going to be suffering from any increases.”
multiple offers.
And Simon Martin, managing director of Harcourts in Tauranga, says there is no specific buyer group missing out. “Demand is good. It’s not like excessive but if you’ve got four people who want to buy a property only one can buy it. I’s really going to be the one who’s got the biggest horsepower.”
Some real estate agents in the regions say prices have gone so high they fear fewer people will end up owning their own homes.
But they also say there is land out there and councils and the Government need to open it up for building.
The Reserve Management Act is stifling progress and until these issues are sorted prices will not likely recede.
In the meantime, FOMO (fear of missing out) rages on in the regions and this is also contributing to high prices.
Elanor MacDonald, of Ray White Hawke’s Bay, says the market started slowly last year but momentum was well underway by Christmas.
“The number of properties available has dropped considerably and we are still very short of properties to both sell and rent across Napier, Hastings and central Hawke’s Bay.
“It is difficult to see how and when this shortage will be alleviated.”
Rising prices are still an issue, especially for first-home buyers, due to the supply and
demand problems.
“There is a lack of new development due to a shortage of affordable available land.
“Councils need to look at policy to allow further rezoning and faster resource consent for land developments.”
Sellers who can afford to buy first and then sell are in the box seat, she says, along with investors who often don’t require the same level of due diligence as first home buyers.
Sellers reluctant to market their homes in case they can’t find another property are likely to miss out in a competitive situation when they put in offers conditional upon selling, and buyers need to move quickly with due diligence to ensure they have their ducks in a row before making offers.
While MacDonald still sees Covid as a threat, she says the market doesn’t appear to agree.
In Hamilton, Jeremy O’Rourke, from Lodge Real Estate, says last year “we went in with a housing crisis and came out with the same crisis.
“We didn’t have enough houses for our population beforehand and so afterwards supply continues to be the issue, not the pandemic.”
The buoyant Hamilton economy is attracting a lot of talent to the city, with housing consents hitting their highest levels last year but when, and if, the market will level out is impossible to predict, he says.
“For now, the biggest opportunity for buyers and sellers is the market itself. Whatever property a buyer can get into I would do so as the market continues to rise and those not in risk being left behind.”
Buyers may find opportunities in developments like duplexes and by hunting for good properties in less popular suburbs.
Fraser Coombes, managing director of Ray White Hamilton, says first-home buyers and investors remain active but, as they don’t add to supply, demand is likely to outpace supply again this year resulting in higher prices.
“Housing affordability will be a major political discussion point this year. While we would all like to see homeownership more accessible and housing affordability improve, I cannot foresee a quick solution.
“Simply put, there needs to be a concentrated effort on increasing supply and making it easier for developers to build at pace.”
Purchasing off the plans this year is likely to be a real opportunity for buyers who can often expect price growth come time of completion, and while Coombes sees Covid as an idle threat to the market. He says last year was a reminder how much Kiwis love property and see it as a safe way of holding wealth in uncertain times.
“I wouldn’t say house buying is immune to the virus but I would say Kiwis’ passion for property, be it a first home, upsizer, downsizer or investor, remains very strong and optimistic across most markets.”
Simon Anderson, from Realty Group, Tauranga, says for every buyer there are others who miss out, so availability of property is key in the year ahead but housing affordability is a real worry.
“As a parent of three children, and a holder of the Kiwi dream, my hope is for them to own their own home one day.
“The easy solution is to just build more affordable homes, however, the fact is we all know there are no free tradespeople right now to build more homes, even if we could source the land.
“It’s not a magic wand exercise but a holistic approach is needed across central and local government plus developers and landowners.”
A big concern is the number of people in emergency or temporary accommodation due to the shortage of rentals and suitable property, he says.
Anderson also says Covid remains a concern but that owning a home gives certainty — but to remember repayment happens monthly and interest rates can change.
Simon Tremain, of Tremains Hawkes Bay, says Tauranga, Rotorua, Taupo¯ , Hawke’s Bay and the Wairarapa represent the heart of regional New Zealand in the North Island with buyer demand at an all-time high but a lack of supply.
“Housing affordability will be a major political discussion point this year. While we would all like to see homeownership more accessible and housing affordability improve, I cannot foresee a quick solution.”
“The current buyer frenzy does not look like having any change in the short-term, with new price levels being achieved in all our regions. I maintain regional New Zealand is where many families would like to live, providing they can find satisfactory employment and a family home to buy or rent.”
With LVRs due back soon and low interest rates, the year will be an interesting one to watch. “My main concern is for our children who will continue to find it near impossible to enter the New Zealand real estate market in the future.”
Ray White Rotorua’s Tim O’Sullivan agrees: “The thing I fear most for the housing market in the months ahead is that fewer and fewer people will, be able to own their own homes. I recently sold a property to a lovely young couple who had previously missed out on several properties, however, they were over the moon to have finally achieved their dream. They wanted us to leave the SOLD sign up after they moved in because it was still so surreal, as they put it, to at last own their own slice of heaven.”
What gives O’Sullivan hope is market forces eventually leading to councils and the Government freeing up more land. “We have so many clients wanting to build a new home but there are only a small number of sections available. The economic benefits when someone builds a new home are immense. Apart from building the house with all the associated trades involved and the building materials, you have new fences, driveways, and landscaping, which includes lawns, plantings, veggie patches, fruit trees, etc,” he says.
“The roll-on effect from that is that many who build a new home have an existing home to sell which creates more stock to the market and the new owners of that home will often doubleglaze the home, modernise the kitchen and bathroom and in some cases create a second bathroom.”
Shona Duncan, principal of Sothebys Rotorua, says limited stock is putting upward pressure on prices. “These record levels manifest in houses selling quickly (24 days is the current regional average) and at record prices as buyers have to spend more to secure the scarce properties on offer.”
And Steve Lovegrove, of the Professionals Rotorua, expects when the borders reopen there will be an explosion of people wanting to migrate to New Zealand.
“We will emerge as the most desirable safe haven from any perspective and thus people with money and the means to do so will flock here. Unless we can dramatically exceed — and, I mean, it will take a miracle — the level of demand increase for housing through massive injection of supply our marketplace and prices will not recede any time soon.”
Lovegrove says house prices are not the problem to housing affordability issues. “Far from it. Housing supply is. Prices are only a consequence of poor supply — fix the supply issue and you fix the price problem.”
The Reserve Management Act is the real problem — “it is the cholesterol that is clogging up the flow of critically-needed housing supply”.
“We absolutely must see bureaucracy cut at central and local government levels and the flow of supply released — any other suggestion is like using band aid for heart surgery.”
In this market buyers should take advantage of capital gains and pay the bank back faster while there are low interest rates, and sellers should get the sharpest negotiator they can. “Don’t ever go with a discount agency. If they don’t know their own worth they won’t be able to establish yours. You need a tough negotiator to make the most of the competition,” Lovegrove says.
“Here’s a clue: it’s your biggest asset. Get the most expensive agent that refuses to discount his fee — that’s the same guy/girl that will use those very skills to get that genuinely better offer for you.”
As for Covid, the housing market has always been immune, Lovegrove says. “Houses don’t catch the flu, but it does seem to cause havoc among economists. In fact, Covid 19 has been a catalyst for house prices if anything and will continue to be so.”
Ritesh Verma, branch manager of Property Brokers Whanganui, says if Covid does return there could be a slowdown.
More houses have entered the market since Christmas but there’s still a shortage and he also worries about housing affordability.
“As much as it’s good to see house prices rising you don’t like to see homelessness or first home buyers being priced out of the market.
“Freeing up land faster and making the RMA easier to work through will be good and with the Government announcing more state houses to be built this year will help, however, this probably won’t come soon enough for some.”
John Bartley, of Bayleys Whanganui, says even the lowest interest rates in a decade are no match for the rate of increase in house prices and
“As much as it’s good to see house prices rising you don’t like to see homelessness or first home buyers being priced out of the market.”
unless wages increase the Kiwi goal of home ownership will not be a reality for many.
There has been no return to normal since Covid arrived, he says. “The potential for a second wave of the virus has meant the real estate sector and other industries have had to adapt how we do things.”
Tony Grindle, of Bayleys Whangarei, expects the market to remain strong unless vendors price too high because buyers will eventually give signs the price is out of step with the market.
The biggest opportunities are in areas which have not experienced such intense market scrutiny, such as Onerahi, Waipu, Ruakaka and the Far North.
And while Covid can stall markets, Grindle thinks the impact would only be temporary. “In New Zealand it has probably accelerated the demand for provincial living away from the masses.”
Buyers, however, should factor in interest rate rises into their budgets.
Paul Beazley, from Eves Wha¯ nga¯ rei, says pressure will remain on the Government and
the construction industry to increase housing stock. His district is growing because of a preference by people to move north to an increasingly vibrant city which will ensure demand continues for new and existing homes, as well as investment property. “If I were planning to sell I would get into the market right now to take advantage of the record prices and strong demand.”
And Mile Beazley, from Harcourts Wha¯ nga¯ rei, says further pressure on availability will be created from buyers keen to get into the market before more anticipated rises and the reintroduction of LVRs. “Those considering selling are in a prime position, however, the question to ask is, ‘Where to next?’”
Covid is still causing uncertainty and at times shaking confidence but Beazley says if there were major interruptions people would pause and adapt then the market would fast return to positive territory. Right now, the Fear of Missing Out has never been stronger — the volume of buyers out there is incredible.”