Auckland’s halo effect in New Zealand's property marketby Bernard Hickey
Auckland home owners are leveraging their $200 billion of tax-free capital gains in the past four years to buy rental properties around the country.
The Auckland halo effect has become a mythical force in the New Zealand property market over the past year – powerful and pervasive, yet hard to pin down.
Why would a modest two-bedroom home on the outskirts of Hamilton or the upper reaches of the Hutt Valley suddenly be worth 20-30% more when the incomes of its residents and tenants are stuck where they were seven or eight years ago?
What is the magical force and who are the magicians? Essentially, it’s all about the astonishing rise in the equity in Auckland homes in the past four years and the ability of home owners there to leverage that equity up with the help of a friendly bank to pay more than locals in other cities can justify.
Auckland’s average house price rose 85% in the past four years, which increased the value of its homes by $230 billion to about $500 billion. Once you take out mortgage growth of about $30 billion, Auckland’s home owners suddenly found themselves about $200 billion richer in equity. Then falling interest rates and an accidental prompt from the Reserve Bank caused Aucklanders to look up over the parapets at the Bombay Hills and Orewa to start buying rental properties in Hamilton, Tauranga, Whangarei and beyond.
The first signs of this phenomenon entered the public consciousness in October last year when then Real Estate Institute chief executive Colleen Milne detailed a 4.7%, or $16,380, increase in the median house price for New Zealand excluding Auckland in the month of September, calling it a sign of a “halo effect”.
Mortgage brokers said they started seeing it in mid to late 2015 when rental property investors and some first-home buyers started to look beyond Auckland for their next or first rental property, simply because they could not afford Auckland any more, or wanted higher yields.
Then the Reserve Bank focused Aucklanders’ attention on other opportunities by announcing in May 2015 that it planned to impose a 70% limit on loan-to-value ratios (LVRs) for investors buying houses in the city from November 1. Realising the ability to borrow to buy Auckland rentals was being limited, they accelerated their hunt for higher yields elsewhere.
Kris Pedersen of Kris Pedersen Mortgages says Auckland investors started to look for better yields elsewhere after prices sprinted higher through late 2014 and early 2015.
“You had a two-pronged effect. You had some investors getting nervous about the yield factor for Auckland who were already starting to look outside. Equity wasn’t really a concern for them. They were more concerned about the cash flow impact.
“Secondly, you had people who were affected by the Auckland LVRs, and they started looking at Hamilton and Tauranga – and then you had the perfect storm.
“We saw a sea change in our business around August or September last year. Previously, around 80% of people in Auckland [wanting rentals] were looking in Auckland. Overnight we went through a period where it went the other way around, particularly looking at Hamilton and Tauranga.” Prices in those two cities have risen 31% and 26% respectively in the last year, according to QV data.
Loan Market’s Bruce Patten also saw the halo effect developing in two stages, driven firstly by falling yields in Auckland and then accelerated by the Reserve Bank’s actions leading up to November 1 last year.
“That was step two of the halo effect, and that’s just pushed up prices around the rest of the country,” Patten said.
Auckland landlords increased their share of purchases in Auckland from 36% in early 2014 to 46% by May this year. The landlord share elsewhere spiked from 37% to over 40% in early 2016, with CoreLogic’s Jonno Ingerson reporting that Auckland investors accounted for 18% of all sales in Hamilton by late 2015. He estimated that both investors and those actually moving out of Auckland were responsible for more than 20% of sales in Whangarei, Tauranga and Hamilton by mid-2016.
This forced the Reserve Bank to announce on July 19 that it would lower its LVR limit for Auckland investors from 70% to 60% and extend it nationwide.
Campbell Hastie of Go2Guys Mortgage Advisers in Auckland says the sheer scale of the rise in equity in Auckland houses means not even the new 60% LVR restriction will stop some investors.
“By the time people have got their heads around it, they’ll just keep going, so long as they’ve got the equity to do it. And if you’ve owned a house in Auckland for 15-20 years, then, boy, you’ve got some equity all right.”
Mortgage brokers say many buyers have plenty of equity left to use and some, particularly older buyers who had no debt at all, will be able to clean up in a market where younger and more leveraged buyers will struggle with the new restrictions.
“You’ve got a lot of the baby boomers and the migrants who have still got substantial equity cash resources who can get out there, and all this is doing is creating another distortion in the market, and it’s making it harder and harder for younger people to get into the market,” Pedersen says.
The potential for the Reserve Bank to introduce new British-style loan-to-income multiple restrictions next year could have a much greater impact, however. More than 60% of landlords have borrowed more than six times their incomes, which would mean a limit similar to the 4.5 times limit imposed by the Bank of England would stop that borrowing dead in its tracks.
Hastie says a limit of three to four times income would have a major impact. “That would totally crash the market, which is not what the Reserve Bank should be looking to do.”
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