Auckland house prices seem to be marching on relentlessly as the provinces struggle to regain lost ground. But how long can it last? asks Bruce Morris
As Auckland's upbeat house market charges on, and so much of the rest of the country remains in various stages of restraint, the key questions for home-owners remain: how long will this go on, and will the gap ever close?
Such simple questions, invariably attract long-winded and wavering answers. The quick-and-loose reply would be "not forever" and "probably not", and no one would put too much money on anything more specific.
The ingredients that have primed Auckland's surging prices - too few properties chased by too many buyers - are in reverse in many North Island areas, most of them outside the other cities, and it is difficult to see any change of fortune.
Beyond the special conditions in Christchurch, none of the big cities are showing anything like the activity Auckland began to enjoy more than two years ago.
QV's housing index shows a national rise in house prices of 8.1 per cent in the year to the beginning of August, but put most of that down to the index muscle flexed by the big two.
Double-digit growth over the last year is virtually across the board for the supercity, and only the distant outposts of Rodney and Franklin are beneath the 10 per cent mark. But every part of the country would relish a bit of the 7.4 per cent annual growth enjoyed by Auckland's straggler, Franklin.
The other cities are just battling away: Whangarei (up 1.1 per cent in the last year), Hamilton (up 3.8 per cent), Tauranga (down 0.1 per cent), Rotorua (up 2.6 per cent), Taupo (up 1.1 per cent), Gisborne (up 1.8 per cent), Napier (up 3.1 per cent), Hastings (up 3.7 per cent), Wanganui (down 0.1 per cent), New Plymouth (up 3.8 per cent), Palmerston North (up 2.3 per cent) and Wellington (up 2.6 per cent).
On the surface, those figures seem reasonable, perhaps reflecting a normal property cycle, with some of the cities running ahead of inflation. But they need to be seen in the context of years of drift or muted activity as Auckland values have raced ahead, surging 12.8 per cent on average over the year to August 1.
While the index shows prices across the country are up 7.5 per cent on the market highs of 2007, Auckland's weighting has a powerful influence. None of the other North Island cities except for New Plymouth (up 1 per cent) has yet returned to the levels of 2007, and some - such as Gisborne (down 23 per cent), Whangarei (down 16.5 per cent) and Wanganui (down 15.6 per cent) - remain in a mire.
For all of those cities, that's six years going backwards as inflation has further eaten away at personal wealth. To maintain purchasing power over that period, a house bought for $400,000 in late 2007 would now need to sell for more than $450,000. The statistics suggest that a $400,000 asset would now be worth $308,000 in Gisborne and $334,000 in Whangarei. In Auckland, it would range between Rodney at $418,000 and Papakura ($424,000) to North Shore ($472,000) and the old Auckland city suburbs ($494,000). Pluck out the best-performing Auckland suburb in that time and the gulf is enormous: Kingsland prices are up 44.7 per cent since 2007, putting the house worth $400,000 in 2007 at a touch under $578,000 today.
Interestingly, the latest spurt has amounted to Auckland getting a bit of its own back, plus interest.
During the boom of 2002-2007, a sort of "herd instinct" kicked in - sending hordes to the provinces with easy finance to buy investment houses. Even the Australians joined in. This new-wave of investors, looking for a seat on the runaway train of house prices, found Auckland values too high, and went beyond the Bombays and the Orewa hills in search of capital gain.
Prices steamed ahead and every area had its moment in the sun. For some, it was all over in a couple of months with perhaps 15 to 20 quick buys (a lot of action in an area where there might be just 50 or 60 sales a year); others felt the warmth a little longer. But in the end the result was the same: when the declining New Zealand economy banged into the global financial crisis, job security faded, money dried up and prices fell as quickly as they had risen. It gave some investors an enduring lesson: there is usually a reason prices seem cheap.
For the next year or two the tight economy and lack of certainty over jobs kept people in the bunker, paying off debt and building bank balances, waiting for sunnier times. The sudden end to demand did more than damage prices; it also killed development.
All that eventually added up to a wave of Auckland buyers who had been biding their time, joining a continually expanding population and finding there weren't enough homes to satisfy demand. Record low interest rates and banks scrambling for mortgage customers were all the fuel they needed.
It showed the novice boom investors there was a reason for Auckland's elevated prices, and illustrated that provincial values had been driven much too high. The demand of a growing population in a city of opportunity will over time always assert itself over smaller centres where jobs are thin or non-existent and growth is weak or negligible.
Since the first quarter of 2011 when the central Auckland suburbs started to stir, the price gain has been substantial - and the ripple effect of that early momentum has long spilled out to all parts of the city.
A good way of measuring that value shift is through rating capital values, set for the first time in the supercity from July 1, 2011. In the QV data in the centre spread of Property Report, all of the 173 Auckland suburbs or towns recorded average sales in the quarter to June 30 above two-year-old capital values, and most were up by at least 10 per cent. Many suburbs recorded levels 20 to 30 per cent higher and some - led by New Windsor, Blockhouse Bay, Glen Innes and Waterview - are steaming towards 40 per cent. All in the space of two years.
Out in the provinces, meanwhile, things continue to look ordinary, relatively-speaking. Hamilton has been solid for a little while, and supply and demand are fairly evenly matched. But it's been a generally flat winter. Whangarei, Tauranga and Rotorua are seeing a little more activity than a year ago, but prices remain subdued.
The provincial towns, except the odd one like Cambridge which is closely linked with Hamilton, are still doing it tough. It's been seven or eight years of static values for most of them and - with stagnant or drifting populations and no jobs to retain their young people - the future for residential real estate is hardly cheery.
In the end, people who own homes in the towns (or intend to buy them) may have to accept that charm, quieter lifestyle and community is what counts, not capital gain.
Kerikeri, one of the gems in Northland's crown, is hardly typical of North Island rural towns. It has a "middle-class" air about it, plenty of stylish properties to match and through the 2002-2007 boom lured Aucklanders and "swallows" (overseas people investing in a pleasant spot in the warm and reliable Northland summer) in decent numbers.
Kerikeri is doing better than many places and, because of its reputation and position, will no doubt come again - and certainly before areas such as Kaikohe, Huntly, Kawerau, Opotiki, Turangi or Tokoroa, or just about any North Island town you can think of. But not for a while yet. Unlike Cambridge, it suffers from the lack of a handy city powerhouse to send rising value waves its way.
Barfoot and Thompson's Jim Broadbent says there's been a little more activity lately, but prices aren't moving. Like the other rural towns, the problem is the exact opposite of Auckland's: a stack of listings, vast numbers of sections and limited pool of buyers. The hammered European economies and currencies are keeping the swallows at home, and Aucklanders are sticking to city boundaries.
In Kerikeri, places can be on the market for six to18 months, and that slow movement is replicated in most towns. Meanwhile, in Auckland the average house sells in 29 days.
Northland vendors, challenged by "prudent" buyers, are becoming more realistic about price after endless open homes and time on the market, says Broadbent. Some of them may have bought a Kerikeri section for $200,000 in the "good years" and spent $350,000 or more on a house. But seven or eight years later, section prices have fallen and a drop to $500,000 might be needed to seal the deal. At the upper end, a property on the river with a jetty that sold for $1.7m in the boom times might now go for $1.2m.
Meanwhile, back to that question of the wide price gap between Auckland and the rest, and whether it will ever close from its newly-elevated levels...Places such as Kerikeri and Cambridge will do better than more depressed towns, but it's difficult to see a narrowed price ratio with Auckland from these levels. When Aucklanders now decide to retire to Kerikeri, Paihia or Thames, they will have much more left over for new cars, fancy boats and overseas trips.
The provincial cities may maintain their own increased gap with their nearest regional towns. However, the ratios that had been fairly constant with Auckland until five years ago have opened out and it's unlikely they'll come back to where they were - certainly with Whangarei and Rotorua, though Hamilton and Tauranga may yet have their days.
On the question of how long Auckland prices will keep rising, we will know more by the middle of 2014 and perhaps earlier.
Of course, prices can't keep going up. Already, Auckland has some of the most expensive housing in the world on income measures and the disconnect between values and rents is being stretched beyond logic. Before much longer, even with the serious lack of supply, buyers will surely say enough is enough.
Because Auckland consists of myriad markets, there has been no uniform, constant rise across all suburbs. As the ripple effect does its thing, one area spurts while another levels out but the overall trend is still going just one way - even up State Highway 1 to Warkworth, Mahurangi Peninsula and Wellsford; and south to outposts such as Pukekohe and Waiuku.
However, there are signs of buyer resistance in the expensive inner-city suburbs and more generally in the upper levels where fewer people are competing for properties - in contrast to the furious activity in the under $700,000 bracket just a little further out. If the bottom and "lower-middle"continue to squeeze the gap between them and the more elevated levels, something will have to give. A price retreat in the low-to-middle range will burn a lot of fingers.
Building more houses will place a medium and long-term lid on prices, slowly bringing supply and demand into balance. A good shakeup in the area of consents and Resource Management Act will help, too, and assuming the city's Unitary Plan stays in shape, supply and demand should find a better balance in the future.
But while there are already good signs development is starting to build, with a big jump in consents in the June year - and plans by National and Labour to free up more land and bring affordable housing back to the city - the supply impact will be gradual.
In the meantime, as confidence in the economy grows, the Reserve Bank will swing from talking of the dangers of inflated house prices to actually doing something about it.
A reasonable guess this far out is that rising interest rates and the bank's moves to restrict high loan-to-value ratio mortgages will, by the middle of next year, have taken the sting from the surge. Perhaps we will see a levelling off from next autumn and winter and, later, even a slight drift back.
A little worryingly, the ASB's latest quarterly survey of housing market sentiment shows only 34 per cent of Auckland respondents think interest rates will rise in the next year. Hopefully the same people haven't saddled themselves with big mortgages and no wriggle room. The Reserve Bank is expected to start lifting rates from March and mortgages may be 1 per cent higher by the end of next year. At today's 5.8 per cent floating rate, that will cost a borrower on a 20-year $400,000 table mortgage another $43 a week. If rates rise to 7.5 per cent (and they were above that level every year from 2003 to 2008), the extra weekly cost will be $82.
If the latest cycle in Auckland does reach a plateau in 2014, a subsequent flat year or two through a high-interest spell will do more good than harm as higher wages in a solid economy pull back the price-to-income ratios to sounder levels. A boost in supply will keep that pressure on values.
But that's just Auckland - taking a breather. Most places elsewhere will offer a different story. Record low interest rates have done nothing to drive prices in many parts of the country in the last three or four years and more expensive mortgages from 2014 are hardly going to stir a late response.