By Greg Ninness
The Auckland housing market is an enigma wrapped in a conundrum.
Surging migration-fuelled population growth is driving up demand, while construction of new homes remains well below what is required to meet that demand.
So growth in demand for housing continues to outpace growth in supply, creating a housing shortage that gets bigger by the day.
By the normal rules of supply and demand that means prices should still be going up, especially as mortgage interest rates remain stubbornly low and may continue to be so for some time.
But instead the market is heading in the opposite direction, with a dramatic fall in the number of homes being sold and prices falling so much that by some measures they are now below where they were 12 months ago.
How can this be?
There are two main factors at work; lack of buying activity from local investors and the drying up of Chinese money.
Housing prices have risen more quickly than rents in Auckland, which has made rental properties relatively less attractive for investors and many of them, particularly professional investors, have fled the Auckland market for other regions where returns are more attractive.
That process has been hastened by Loan-to-Valuation Ratio (LVR) restrictions the Reserve Bank imposed on new mortgage lending by banks.
That took a big chunk of buyers out of the Auckland market, which had a major impact.
But a more significant impact, both in terms of the strong growth in Auckland house prices over the last few years and the more recent decline, was the river of money flowing out of China.
There were two drivers of this, people living in China who wanted to invest their money overseas, and people who had moved to New Zealand from China but whose main source of income and/or capital remained in China. Auckland residential property has been an attractive option for both groups.
If the investor was back in China the purchase would often be made through a local associate, which is why so few overseas buyers of residential property have shown up in the official statistics.
But whether the buyer was resident in this country or not, the important thing is that the money was coming from China.
That was an international phenomenon affecting housing markets around the world and this country was no exception.
It would be hard to overestimate the impact it had on Auckland’s housing market.
Last year at the big Auckland auctions where several dozen homes could be auctioned on the same day, it was not uncommon for 80% or more of the homes sold to be purchased with Chinese money.
But that all started coming to an end late last year when the Chinese government clamped down hard on the amount of money people could send out of the country, and the Australian-owned banks here raised the threshold for providing mortgages to people whose main source of income is from overseas.
Within a very short space of time the river of money that had been flowing out of China into the Auckland housing market had turned to a trickle, and so far it shows no sign of picking back up.
With investors and Chinese money both out of the Auckland market at the same time, demand slumped.
Under normal circumstances that would have created an opportunity for first home buyers to fill the void.
But by the time that happened, the speculative frenzy of the previous few years had pushed Auckland prices beyond the reach of most first home buyers, including many of the migrants settling in the region.
Those buyers that were left in the market and able to afford to buy were either the wealthier migrants or people who already owned a home and were looking to make a change, often baby boomers looking to make a lifestyle change.
And with fewer buyers around, it wasn’t long before new listings started to exceed sales by a significant amount.
If it was wasn’t for the fact that demand for housing in Auckland exceeds supply by such a large margin there would very likely have been a significant housing market crash.
Instead we’ve had a market where prices are slowly deflating to the point where new entrants to the market can afford them.
So could removing LVR restrictions on mortgage lending or a drop in interest rates revive Auckland’s housing market?
Perhaps a little but probably not a lot.
They wouldn’t have any effect on the supply of Chinese money or alter the fact that the rental yields on Auckland properties are still lousy.
And first home buyers aren’t getting much help from rising incomes while real wage growth remains low.
So affordability remains the issue that’s weighing on the market and depressing prices.
And regardless of which party wins next month’s election, none of those things look like changing anytime soon.
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