Auckland house prices: End of the golden weather?

by Graham Adams / 04 May, 2018
RelatedArticlesModule - house prices

A market already in the doldrums may get side-swiped by the repercussions of the Australian banking inquiry.

For many years, Aucklanders have been renowned — and reviled — for talking endlessly at social gatherings about the spectacular rise of house prices. For years, it seemed conversations at dinner parties and functions would inevitably turn at some point to the eye-watering values across the city.

Now talk is turning increasingly to cautionary tales… houses in good suburbs not getting a single bid at auction even when priced at CV; houses in even better suburbs selling for a hundred thousand or more below CV; the spectacular transgressions of the parents of our Big Four banks being exposed at Australia’s Royal Commission and whether this will trigger a trans-Tasman credit crunch as they are obliged to obey lending laws to the letter.

And then there is the statistical evidence of a faltering market. In mid-April, Real Estate Institute figures showed Auckland house prices, which were rising at more than 20 per cent annually three years ago, had fallen 2.2 per cent in the year to March 30.

Over the three months to the end of April, according to CoreLogic’s index, Auckland prices dropped by 0.3 per cent.

And there is the ballooning inventory of houses for sale on real estate websites with the only likely outcome being lower prices as vendors eventually accept the market has changed.

There are other signs dedicated property watchers notice. On interest.co.nz, one real estate devotee has observed a sharp increase over the past nine months in the number of Auckland listings on TradeMe tagged “urgent” (up 33%) or “priced to sell” (up 56%).

It is also obvious to observers that, as clearance auction rates dwindle, more and more properties are being listed with an asking price rather than an auction date.

Another indicator of an Auckland housing market in the doldrums is the NZ Herald’s coverage. Just a year ago, the nation’s biggest newspaper was running stories about saintly souls on low wages who had managed to buy a house in one of the most over-inflated markets in the world by scrimping and saving like demons.

On April 4, 2017, Herald readers could follow a gripping account of “How a cleaner bought two Auckland homes”. Anna Feng, a Chinese immigrant house-cleaner who arrived here in 2008, bought two houses in Auckland — her first in 2010; the second in 2016. Her financial success, we were told, was due to her austerity programme of growing her own vegetables, wearing second-hand clothes, using LED lightbulbs to save on power, and selling trinkets at flea markets at the weekends. 

There was a husband involved in both purchases — mentioned only in passing — but there was no evidence of how much he contributed or whether he earned a lot more than his wife. No doubt that would have ruined the story.

Now such stories are rarely, if ever, seen. The message that it is worth enduring swingeing poverty and hardship to buy a ridiculously overpriced house is no longer remotely plausible — especially given prices aren’t shooting up. And most Aucklanders now believe house prices are either going to drop or stagnate, which means there is no hurry to buy and it might be prudent, in fact, to delay as long as possible in order to build a bigger deposit.

This pertinent truth often tends to be obscured. On May 1, the Herald ran a story in its real-estate section One Roof, headed: “Sharp rise in Kiwis expecting increase in house prices”. It added on the website blurb: “New poll shows growing belief that property market will enjoy 'second wind’.” 

Actually, it wasn’t a story, it was a regurgitated press release from the Property Institute which quickly revealed that the predicted “second wind” was likely to be short-lived. And you had to read almost to the end to find out that, although some of those living outside Auckland were bullish, “Aucklanders, by a majority of 54 per cent, are most likely to think that property prices have stabilised.”

That was all the information offered on Aucklanders’ opinions despite the fact they make up the overwhelming majority of the Herald’s readers.

When NOTED asked for a breakdown of the poll figures from the Property Institute, it showed 30 per cent of Aucklanders think prices will increase in the next six months while 13 per cent think they will fall.

Adding the 13 per cent of “fallers” to the 54 per cent who see stagnation ahead means 67 per cent (or two-thirds) of the Queen City’s inhabitants believe prices won’t rise this year — which would have made a very different headline for Auckland readers.

The obvious conclusion is that there is probably no hurry to buy, and equally obvious that the Herald, which has long been dedicated to boosting the housing market, was in no hurry to point out that fact to its Auckland readers. Desperate times demand desperate measures.

For a while now, what are usually described as “headwinds” for the housing market have been highlighted by independent commentators. They include the prospect of higher interest rates as the US reverses quantitive easing, the Labour-led government’s push to ban foreign buyers from our residential market, and the striking fact that Auckland’s housing market is so ridiculously high compared to incomes that only the overly optimistic can imagine this situation can persist.

Now a wildcard has been thrown into the mix. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry sitting in Melbourne has thrown up evidence of dubious practices by mortgage lenders, including the likelihood of large numbers of “liar loans” having been approved.In large part, they are a result of banks not bothering to check carefully that what customers say about their incomes and expenses are true.

Inflating income and minimising expenses to qualify for gargantuan loans has become commonplace to such an extent that global financial services firm UBS claimed last year that almost a third of Australian mortgages — worth around $A500 billion — may be risky

As a result of such calculations, and revelations from the commission’s inquiries, Shayne Elliott, the CEO of ANZ in Australia, has warned that the home loan approval process there will become more stringent, with mortgage applications taking longer to approve and requiring more documentation.

And it’s very possible that our big banks will apply the same approach in the New Zealand market — whether there is an inquiry here or not — given they are owned by the Big Four Australian banks.

Stricter lending requirements that take into account borrowers’ actual expenses rather than a default, standardised measure will slash the amount of money a bank will be willing to lend on mortgage. And that will inevitably mean lower house prices as borrowers have far less to spend.

Elliott told the Australian Financial Review that mounting headwinds” and the inquiry’s findings signal the end of a 20-year “golden period” of banking.

And quite possibly it will mark the end of the golden weather for Auckland’s stratospheric house prices too.

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