By Frank Newman on 9th June 2014
The June issue of the ANZ Property Focus report has worthwhile commentary about housing trends, interest rates, and the demand vs supply of housing. Here are some of their key points.
The ANZ say, “The property market has slowed in response to rising mortgage interest rates and the LVR (Loan-Value-Ratio) speed limits imposed last year. However, the low sales activity has yet to fully translate into a moderation in house price inflation, although the first signs are starting to appear. With rising net immigration and an inadequate inventory of houses keeping prices supported, and the broader economy strong, expect another tap by the Reserve Bank on the real estate market brakes – the OCR (Official Cash Rate)”.
In other words, expect the OCR to rise another 0.25% to 3.25% at the Reserve Bank review on 12th June. The ANZ place a 50% probability of a further rise on 24 July.
On interest rates they say, “ANZ’s carded mortgage rates have seen a number of changes in the past month, with the bellwether 2 and 3 year fixed rates falling as competition in the mortgage market heats up, while shorter-dated fixed rates continue to lift in line with a higher OCR. Borrowers with at least 20% equity will find it hard to go past the 2 year fixed rate special of 5.85%, which is back to December levels and now close to the cheapest rate on the curve.”
On the matter of housing demand and supply they say Auckland, Christchurch, Wellington and the Bay of Plenty have a housing shortage, while the rest of New Zealand has too many houses. They show there is ‘excess demand’ of around 3,400 dwellings nationwide, equating to approximately 0.2 percent of the nationwide dwelling stock.
“This suggests the nationwide situation is broadly in balance…A shortage of 14,000 units in Auckland (3 percent of the housing stock) is problematic but far from disaster material, and to some degree partially explains why the rental market has not gone ballistic. Recall, early estimates put the housing shortage in Auckland as high as 30,000 units; revised and updated census figures have cut that by more than half.”
They go on to say, one of the peculiarities about Auckland is that rents have not kept pace with rising property values.
“According to the March 2014 CPI, the annual increase in Auckland dwelling rents was 2.3%, not much above that of the 2% nationwide average. Other motives, including the focus on capital gain, may be behind small movements in rents, but with rental yields in the Auckland residential market (around 4% according to our estimates) already very low in relation to (rising) interest costs, something has to give. Either rents move up more sharply or prices fall.”
This highlights the point that investors are generally prepared to accept a lower rental yield (lower rent) if they make up the shortfall in property value gains. It is therefore logical to assume, should there be less capital gain, for whatever reason, investors will increase rents to maintain their expected returns. One of the unintended consequences of a capital gains tax (should it slow house price value increases) would be a general increase in rent. Renters would end up bearing some of the cost of a capital gains tax.
The most over-supplied housing areas are: Southland, West Coast, Gisborne, Manawatu, and Northland.
The Regional Economic Activity Report 2014 published by the Ministry of Business, Innovation and Employment show Northland’s average household income is $69,300 and the median House price to be $300,000 (or 4.3x average household income). In Auckland the media house price of $565,000 which is 5.7x the average household income.
As a comparison, other affordability figures are: Nelson 4.7x, Bay of Plenty 4.5x, Wellington & Hawkes Bay 4.0x, Gisborne 3.8x, Taranaki & Otago 3.6x, and Southland 2.4x.
Not surprisingly, this reflects the truism that house prices are high where people most want to live.