Andrew Bruce: Why are house prices so high?

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Property investors group says investors aren't to blame for driving up Auckland house prices
Most property investors are generally less willing to pay as much for a property as would a home-buyer, says Andrew Bruce. Photo / Thinkstock
Most property investors are generally less willing to pay as much for a property as would a home-buyer, says Andrew Bruce. Photo / Thinkstock

As the president of the Auckland Property Investors' Association (APIA), I am regularly approached by members disputing the portrayal of investors as the main driver of Auckland house prices.

Being a property investor, I am undeniably return focused.

As are other investors.

In the case of residential property investment, return is determined by the price we pay for a property in relation to the rental income it generates after all the expenses have been deducted.

Investors view properties through a very different set of lenses as home-buyers.

From my experience most property investors are generally less willing to pay as much for a property as would a home-buyer.

Faced with purchasing a property, investors are driven by our own sets of financial criteria whereas home-buyers are more likely to be governed by emotions.

After all, investors are acutely aware that a high purchase price will only have a negative impact on the net return.

What then is the incentive for investors to drive up home prices?

Confronted by the undeniable current upward trend of Auckland house prices and setting aside the rhetoric, I feel compelled to ask, 'If investors are not driving up the house prices then who is?'

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Many commentators have rightly pointed out that there is not one particular factor contributing to the high prices we see today.

Read More:
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House price rises leave pay increases for dead

The Auckland property market is fueled by a series of pressure points all working together to drive prices upwards.

One such pressure point is the suppression of building work in this city as the result of the skyrocketing cost of doing business with council.

Andrew Bruce, president of the Auckland Property Investors' Association.
Andrew Bruce, president of the Auckland Property Investors' Association.

An APIA member recently completed a basic one lot subdivision of his rental property within the Auckland region.

The project started in July 2012 and took a year to complete, this was after extensive delays throughout the process.

While the actual physical work involved (i.e. installation of the underground infrastructure) took only three weeks, the paperwork took 49.

Along with the extended delays (and lets not forget delays incur extra holding costs), the costs as a percentage of completing the subdivision are as below:

Costs to complete a subdivision
• Direct council costs (including consents and development contribution) 46pc
• Surveyor 24pc
• Contractors 28pc
• LINZ and lawyer 2pc
Total 100pc

When we compare the council costs to the value of the section created these were 15 per cent of the actual sale price of the section.

These costs do not include installing a new water meter and paying WaterCare's infrastructure growth charge.

If the current cost of this was added it would be another 5 per cent of the sale of the section.

Another member who has built numerous minor dwelling units throughout Auckland over the past 13 years has also felt the price-pinch.

Back in 2003 he intimated to me that obtaining a consent for a minor dwelling unit cost $2,000.

Recently he received approval for a similar consent which cost $42,000.

This is the equivalent of a 2,000 per cent increase in price over 11 years.

Included in the $2,000 council fee back in 2003 was a $684 charge for a water meter.

Today the price for a water meter and connection from WaterCare is a minimum of $12,770 which is a 1,767 per cent increase over 11 years.

The cost increases described above only account for direct council costs.

One must also anticipate the significant pecuniary burden associated with time delays and uncertainties which in many cases spell the demise of a project before it even starts.

For a building project to be economically viable and therefore be green-lighted by financiers, investors, and developers, these costs have to be justified by the final sale
price.

Until then our housing supply simply will not stand a chance at catching up with growing demand.

Andrew Bruce is the president of the Auckland Property Investors' Association.

Debate on this article is now closed.

- NZ Herald

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