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By Tony Alexander, BNZ
A year ago, I wrote in JUNO about the factors that had pushed Auckland house prices up so strongly, especially since 2009. These included:
• a catch-up after a relative lull from 2003
• strong population growth
• a shortage of houses
• high levels of immigration
• rising household incomes
• a high public awareness of prices rising, which encouraged people to buy.
I predicted that the strong market would continue, in spite of official efforts to slow it down. And it did – until October 2015.
At that point, the government introduced a rule that property purchasers had to use an IRD number when buying. As a result, we did see activity hit a brief slow patch. Prices on average fell slightly and investors who’d been dipping their toes into regional markets jumped in and bought property there instead of in Auckland.
This regional surge is still noticeable in the towns and cities closest to Auckland, and has also been seen in Wellington and, more recently, in Nelson and Gisborne.
A short-lived lull
But in Auckland, this pause in activity was fleeting. In fact, the market slowed for only four months, while investors focused on buying outside of the city, and foreign buyers got their IRD numbers in order.
Then in February this year, Auckland average house-sale prices rose by 5.5 per cent, and by another 4.3 per cent in March. A number of factors are behind this growth.
• Foreign buyers have reappeared in the market.
• Interest rates have fallen to record low levels.
• Jobs growth has been strong.
• Migration numbers continue to set records.
Auckland Council planned to increase the density of housing in many areas, which would have helped with the housing supply problem. However, homeowners in Auckland’s ‘leafy suburbs’–such as Glendowie, St Heliers, Orakei, and Westmere – rebelled, and had those plans overturned.
Debate continues to run hot because people are concerned about the pace of Auckland house-price rises, and angry that young buyers are consequently having to look outside their desired suburbs.
Is land tax the answer?
To address the property issues, Prime Minister John Key has even floated the idea of an annual land tax for foreign landowners.
When politicians start to get involved, we need to ask ourselves whether the economic tools we have are strong enough to stem price rises. Or are background factors perhaps working against further price gains?
So, will a land tax be introduced? The problem here for the government is that once a land tax – intended to target foreign investors – is in place, a left-leaning government could easily extend it to local homeowners.
This could hit many older people hard, who will have seen the value of their houses soar, while their incomes haven’t gone up. For example, a 1 per cent tax on property would mean the owner of land valued at NZ$700,000 would get a bill for NZ$7,000 a year.
We do not yet have enough reliable information on the role foreign buyers are playing in the strongly rising prices. They are certainly one cause of them, but I believe they have less of an impact than other factors.
It’s highly likely that introducing a land tax could have as little effect as many other steps that have been tried in the past, which include:
• In 2010, removing depreciation allowances for investors.
• In 2011, taking away investors’ ability to use Loss Attributing Qualifying Companies (LAQCs) to reduce their tax.
• In 2013, introducing the loan-to-value rules, which restrict the amount purchasers could borrow.
• Last year, introducing the IRD-number rule.
• Last year, introducing the two-year ‘bright line’ test, which taxes the profit if a house is sold within two years of buying it.
• Last year, imposing a minimum 30 per cent deposit requirement for investors.
What else underlies the surging house prices?
Other likely reasons lie behind the sustained increase in house prices. A nearly 3 per cent a year growth in Auckland’s population, for one. This is coupled with an existing housing shortage that’s worsening, because houses are not being built quickly enough to close the gap.
Add to this record-low borrowing costs, Auckland’s firm economic and income growth, and physical land constraints, and you have a picture of an overheated housing market.
The fundamental factors pushing up Auckland house prices remain, but an endgame must come, even if it’s in the form of prices flattening in two to three years, rather than falling sharply.
Politicians will be reluctant to take tough steps, because few people will vote for a government that brings in laws that make house prices to fall.
A different picture in the regions
Conditions in the regions are very different from those in Auckland, so buyers need to be cautious. However, a strong link to Auckland’s economic growth means this warning does not apply quite as much to Hamilton and Tauranga.
It pays to note that, historically, investors overestimate regional population growth. In the past 20 years, Auckland’s population has grown by 0.7 per cent a year from international migration, but everywhere else in the country the population has decreased by 0.1 per cent.
Auckland also has the youngest population in New Zealand, so it has the greatest growth from births exceeding deaths.
People buying in the rest of New Zealand shouldn’t assume that large numbers of young people will leave Auckland long-term. They should listen to the way some young buyers talk about their decision to shift to the regions, saying that when they’ve saved up enough money for a large deposit, they will shift back to Auckland.
For now, I expect Auckland house prices to rise further, due to a continuing drop in interest rates and huge migration flows. And home construction is not happening fast enough to prevent the housing shortage worsening.
Regional prices will also go up as Auckland investors look elsewhere for a good return on their investments. Local buyers are likely to respond by doing their own investing.
But in two to three years’ time, with stronger controls on credit availability – such as even higher deposit rules for investment property purchases – we are likely to see prices stabilise.