Homes on hold as sales ‘fall off cliff ’
Auckland’s largest apartment project has to hand back deposits as new-build purchases slide into 10-year slump
Developer Ockham Residential has had to hand back dozens of deposits to customers after failing to achieve enough pre-sales to get one of its biggest-ever Auckland apartment projects off the ground.
The Feynman 165-unit complex planned for 339-359 Great North Rd in Grey Lynn is the biggest apartment project by gross floor area outside the city centre.
But with Auckland new-build apartment sales at lows not seen in more than a decade, Ockham only achieved about one-fifth of its desired pre-sales, company co-founder Mark Todd said.
The developer has subsequently given deposits back after spending a year trying to hit its target.
“We just want people to be able to move on with their life, and we’ll relaunch it at some point, hopefully in the next six months in 2024, with the market picking up,” Todd said.
The pausing of The Feynman highlights the challenges ahead for the construction industry as well as its boom-bust cycle.
Todd said newbuild apartment sales have “fallen off a cliff ” to lows not seen since 10 or 15 years ago.
Zoltan Moricz, executive director of research at commercial real estate company CBRE, said the market boomed in 2021 where there were typically about 400-plus newbuild apartment sales in Auckland each quarter.
This year, however, only 41 newbuild apartments were sold in Q1 and 55 in the following three months to the end of June.
But while sales are down, Todd said he’s nevertheless rapt at the amount of work his company has done this year.
Ockham is set to deliver its highest number of finished new apartments in a calendar year.
That’s mostly based on sales made in 2020-21 due to construction typically lagging two to three years behind the start of projects.
“We’ve been hellishly busy and we’ve delivered close to 500 apartments – this is a record number,” Todd said.
“I’m feeling a huge sense of relief because in January, I had five unfinished projects and $450 million of outstanding projects.”
The 481 apartments across five developments the company is set to finish in 2023 is double its next best year, when it completed 240 apartments.
The two final projects due in 2023 are the 255-unit Manaaki in Onehunga and The Greenhouse in Ponsonby.
Todd calls The Greenhouse a “flagship” and a “once-in-a-career” project.
Its distinctive green-glazed bricks are designed to reflect the green of west Auckland’s Waitākere Ranges, while the style of the building would be at home in classic US neighbourhoods, he said.
“It really is more of a Chicago- or New York-style building with an Aotearoa twist,” he said.
Last week, the construction covers came off giving Aucklanders the first chance to see and judge it for themselves.
The way forward for residential apartment builders is less clear.
However, Todd said there were signs of the green shoots of recovery, with Ockham having just had its best week of sales in 18 months.
The general consensus across the property sector is also that house prices have finished falling, he said.
That should have a positive impact on the newbuild market, as making pre-sales in a falling market is notoriously hard as customers hold out in the hope of lower prices, Todd said.
Todd’s optimism also tallies with new figures out by property analysts OneRoof and Valocity.
New Zealand’s quarterly house prices have just recorded their first rise in 16 months.
The nationwide average property value grew 0.8 per cent to $952,000 in the three months to the end of September, on the back of stronger-thanexpected sales activity in the lead-up to spring.
Auckland’s average property value also rose 1.6 per cent over the past three months to $1.3m.
OneRoof editor Owen Vaughan said the lifts were surprising given interest rates were still high and home buyers were being squeezed by costof-living pressures.
“Huge demand from Kiwis competing for a small pool of properties and stronger-than-expected immigration are driving growth, ”Vaughn said.
Vaughan said while the number of homes for sale on the market had grown, it was still below historical levels.
“Auckland new listings in September were up 13 per cent year-on-year, but total listings were down 8.5 per cent over the same period,” he said.
Ockham’s Todd said that because apartment construction lags sales by two to three years, there is likely to be a lull in newbuilds in 2024.
“This year we pulled down five cranes, next year we’re putting up one at this point,” he said.
“There’s lots of projects consented and ready to go, but it will take a few years for the crane count to get back up in the apartment market.”
Ockham has augmented its construction portfolio by taking on a number of smaller and mid-sized projects that are easier to get off the ground because they require fewer pre-sales.
Big projects like The Feynman typically need to be launched in stronger markets so the large presales targets needed to make them financially viable can be met, Todd said.
He said it is “frustrating” to hit pause on the project – which now sits as a large bare block on Great North Rd – but that’s the way the industry cycles go.
“We’re passing north of $20m invested in buying the land and getting a resource and full building consent for the project,” he said.
“But I’ve been in property development for 27 years now and this just happens.”
Nevertheless, Ockham remains confident it can relaunch the project soon, perhaps in 2024.
“We’re definitely not selling the site,” he said.
The expectation is that interest rates will, over the years to come, be higher than prior years.
Imre Speizer, Westpac
Wholesale interest rates here and abroad are at multi-year highs as markets grow more sceptical about central banks’ ability to tame inflation.
The five-year swap rate, which can have a bearing on home mortgage rates, is now at 5.20 per cent — its highest point since 2010.
It’s a similar story across the yield curve, longer-dated bonds feeling more of the brunt.
Two-year swap rates are at 5.69 per cent — back at 2008 levels — as are two-year government bonds, which trade at 5.71 per cent.
Ten-year bonds are at 5.225 per cent, returning to levels not seen since 2011.
Meanwhile, US 10-year Treasuries this week hit 4.625 — their highest point since 2007. “Essentially markets are reacting to the reality that central banks may have a bit more work to do,” ANZ strategist David Croy said.
“The recent rise that we have seen in oil prices (to close to US$100 a barrel) has exacerbated those fears that there will be an acceleration of inflation.”
Even so, it looked as if the US Federal Reserve was doing well in engineering a soft landing for the US economy, and no one there was talking “recession” just yet.
Added to the mix was general turmoil around Italy’s bigger-thanexpected budget deficit, which has hit European bond markets, and threats of a US government shutdown over the administration’s spending cap.
Westpac market strategist Imre Speizer said much of the local interest rate market’s movement had been driven by overseas trends.
“The US has led the way — that rise in the US really kicked off in April and has just kept on going and going and going,” he said.
September was notable because it accelerated faster than it had done in prior months, he said.
“Longer-term rates are rising and outpacing any movement in short rates.”
He said bond markets here and overseas are being driven by three big themes.
The first was general market scepticism about whether central banks can really get on top of inflation.
“Sure, they [central banks] are pushing rates higher, which is doing some of the work, but markets are doubtful that they will do enough.
“So if you end up with inflation still higher than where it should be, that’s going to push up longer-term bond yields.”
The second theme was the now generally accepted idea that interest rates will stay higher and for longer than was previously thought.
“The expectation is that interest rates will, over the years to come, be higher than prior years, so there is a view that your natural level of interest rate now needs to be higher.”
Market expectations are now for America’s highly influential Fed Funds rate — currently at a 22-year high of 5.25 to 5.50 per cent — will stay at least as high over the next year or so.
Earlier this year, the market was thinking 100 to 150 basis points of cuts in the Fed Funds rate would soon be on the cards.
“They have taken that out and have got the message from the US Federal Reserve that rates are high and might go higher, and that they are going to have to stay higher relative to what the market had been pricing in, so the market has had to adjust to that,” Speizer said.
Thirdly, there was the sheer weight of new issuance coming on to the market.
In many countries, government finances have deteriorated and governments have needed to borrow more money, which has meant more bond issuance.
More bonds on issue means that yields need to rise to attract buyers.
“That supply story has been evident clearly in the US and in New Zealand.
“Most countries are grappling with their government finances and markets are expecting bond supply to remain high or even increase.”
In New Zealand’s case, the Government’s borrowing has increased three-fold compared with pre-Covid years.
In the five years leading up to the pandemic, the Government was borrowing $7 billion to $8b a year through the bond market.
This year it plans to raise $36b, and $35b in the following year.
The longer end of the yield curve tends to move in step with international trends, whereas the shorter end tends to react to more domestic issues.
On that score, shorter rates are higher but the extent of the gain has been less pronounced than it has been in the long end.
Financial markets are not pricing in a change to the official cash rate — currently at 5.50 per cent — by the Reserve Bank at next week’s monetary policy announcement.
Beyond that is a different story, and the market is not ruling out another rate hike before the Reserve Bank calls its quits.
Financial markets are pricing in a 50/50 chance of a rate hike in November, but the likelihood of an increase is seen as being close to 100 per cent early next year.
“People have under-expected how high rates can go, and they are still climbing, so we are not out of the woods yet,” Westpac’s Speizer said.
“We ourselves thought that by the end of this year that would be done and the markets would be thinking about the next easing cycle.
“That was premature. It’s not going to happen this side of Christmas.”
The general volatility in world bond markets has been made worse by developments in the northern hemisphere.
The Financial Times reports that
We . . . thought that by the end of this year that would be done and the markets would be thinking about the next easing cycle. That was premature.
Imre Speizer, Westpac
European government bond prices dropped sharply this week as investors took fright at Italy’s largerthan-expected budget deficit and mounting concerns that central banks will keep interest rates high for an extended period.
Italian 10-year government bond yields rose as much as 0.17 percentage points to 4.96 per cent, their highest level in a decade, after Prime Minister Giorgia Meloni’s Government raised its fiscal deficit targets and cut its growth forecast for this year and next.
The sell-off spread to UK markets, where 10-year yields rose as much as 0.2 percentage points to 4.57 per cent — the biggest daily rise since February — before ending the day at 4.48 per cent.
The FT said US stocks and government bonds are on course for their worst month of the year as investors respond to the Federal Reserve’s message that interest rates are set to stay higher for longer than previously thought.
Wall Street’s benchmark S&P 500 stock index has fallen more than 5 per cent in September — dragging it towards its first quarterly loss in 12 months.