Investors chasing big capital gains in the Auckland property market are making it harder for first-home buyers to afford a house. Andrew Laxon outlines the problem.

Are investors crowding first-home buyers out of the market?

Many would-be first-home buyers say they lose out to wealthy speculators all the time, especially as the two groups usually compete at the lower end of the market.

James Rea and his wife Avana told the Herald last week they got sick of being easily outbid at Auckland auctions by investors "looking to line their pockets", so they moved to Tauranga where they could buy an almost-new three-bedroom home for $520,000.

Property Investors Federation executive officer Andrew King argues the reverse can be true, as wise investors look strictly at returns. "A lot of the time an investor will be outbid by a first-home buyer who falls in love with the property."

But new research by Dr Michael Rehm and Ozgur Yildrim of Auckland University finds investors are dominant at the cheapest end of the market, buying 80 per cent of free-standing homes in Otara and 81 per cent of Newmarket apartments in the first half of last year.


Housing data shows a steady advance of investors, from 32 per cent of all sales in 2005 to 44 per cent in March. In a speech last August, Reserve Bank deputy governor Grant Spencer noted movers were being crowded out too. He also spelled out wider economic concerns: "The increasing investor presence is likely to amplify the housing cycle, and worsen the potential damage from a downturn, both to the financial system and the broader economy."

Prime Minister John Key and deputy Bill English have hinted that the increases in Auckland are not sustainable.

Why are investors becoming more active?

Auckland's runaway prices have upset the usual investment rules. As CORT community housing trust chief executive Peter Jeffries pointed out in the Herald last week, rents have not kept pace with price rises, meaning yields have dropped to historic lows of 2.6 per cent - below the cost of borrowing. However, many landlords have been more than compensated by much bigger capital gains - house prices have tripled since 2001 and continue to register double-digit annual increases.

This has led to an expectation that prices will rise indefinitely, even though Auckland prices are already well above most international benchmarks, including price-to-income and price-to-rent-ratios. Investors keep buying because interest rates are low, immigration is powering along at 67,000 arrivals a year and Auckland remains short of at least 40,000 houses as a frantic building programme fails to keep pace with arrivals.

Are Chinese buyers pushing up prices?

Every second Aucklander has a story about the overseas Chinese buyer who paid or offered a small fortune for their house. But it is hard to know the true effect because we don't keep records of property sales to foreigners.

The closest we have come to finding out was in July last year, when the Weekend Herald revealed sales records obtained by the Labour Party from a Barfoot & Thompson agent, which showed people with Chinese surnames had bought 40 per cent of houses sold from February to April. (The list made up 45 per cent of Auckland sales in that period.) Labour housing spokesman Phil Twyford rejected claims of racism, saying only 9 per cent of Aucklanders were Asian, so most of the buyers must have been from offshore.

Auckland University statistician Thomas Lumley pointed out that since the buyers equated to only a small fraction of the city's 120,000 Asian residents, it was theoretically possible that most were in fact locals, not foreigners, as several real estate agents claimed. Regardless, observers reported an abrupt drop in clearance rates at auctions from 70 to 30 per cent - and a temporary cooling of the market - once new rules (keep reading) made it slightly more difficult for foreigners to buy here.

What has been done to stop prices climbing so fast?

In 2013, the Reserve Bank introduced loan-to-value ratio (LVR) restrictions, which forced banks to require a 20 per cent deposit, with an exemption on 10 per cent of their residential lending. In November last year the bank relaxed the exemption to 15 per cent of lending outside Auckland, but toughened the rules for Auckland investors with a 30 per cent ratio and only a 5 per cent exemption to combat speculators. Most commentators agree the rules have been effective, but at the expense of first-home buyers, who find it much harder to raise a 20 per cent deposit.


From October, the Government's tax changes also kicked in. Under a so-called "bright line" test, a capital gains tax must be paid on properties not occupied by the owner and sold within two years, regardless of whether the seller says it was intended as investment or not. Foreign buyers now need an IRD number and a New Zealand bank account to buy property, although there are still no plans for a register.

Has it worked?

Until a week ago it was possible to argue yes - or at least maybe. Prices dropped in Auckland over Christmas and sales volumes slumped. But last week the local market roared back into life, as REINZ figures showed a $70,000 jump in the median house price to $820,000. Westpac and ASB economists speculated that the Reserve Bank would soon respond with harsher lending restrictions, such as a 40 per cent deposit for Auckland investors.

Independent real estate economist Rodney Dickens argues the dip late last year was just random variation - although he thinks the October-November changes had an effect.

King believes the local effect has been overstated as Chinese buyers were in retreat around the world from about September, before the new rules started. Whether they return in force this year depends on two competing factors within China - liberalised exchange controls which are predicted to allow a "tsunami" of money to flood international markets and a clampdown on corruption, which would have the opposite effect. As the graphic above shows, the money may not flow back here anyway. Auckland now looks more expensive than Sydney in most foreign buyers' currencies.