Property Report: The Auckland enigma

Auckland house prices are going to be out of the reach of people on low paying jobs - Dr Ganesh Nana.

Auckland house prices have spiked at various times over the years, but what makes the current situation exceptional is that it is not abating and it is out of sync with the rest of the country. A Reserve Bank bulletin written by Elizabeth Kendall shows today's market is unprecedented and unpredictable.

What is particularly disturbing is that it shows Auckland prices up 52 per cent over the past three years, while the rest of New Zealand has only increased 11 per cent. This disparity started in 1981 with the average increase of Auckland house prices at 4.5 per cent and 2.5 per cent for the rest of New Zealand.

Dr Ganesh Nana, chief economist and executive director at Business and Economic Research Limited (BERL), says the gap between Auckland and New Zealand prices is unlikely to be closing anytime soon.

"What we've got is an inherent or embedded wedge between Auckland house prices and New Zealand house prices. That discrepancy is accelerating considerably and is becoming embedded in the system. That's what's making the problem even more intractable."

Nana says there are many reasons for Auckland's high house prices but the main one is what he calls "pure speculation". It's also fuelled by the Reserve Bank's low interest rates, but says the bank cannot control the housing market.

"The expectation cycle feeds on itself and becomes a self-fulfilling prophecy."

Homeowners often expect to increase their wealth significantly through the appreciation of the price of their house. He says a house is an asset and we can expect it to increase in value a little bit, but not an astronomical amount. Nana doesn't blame property investors cashing in but considers them part of the problem.

The Reserve Bank bulletin shows that house prices in North Island provinces have risen 63 per cent higher than they were in 1981. But house prices in Auckland have increased an incredible 352 per cent over that same period.

"It's a symptom of the growing divergence in the New Zealand economy and society."

With fewer jobs in rural areas, Auckland is seen as the only growth part of New Zealand. This perception fuels internal migration and rising house prices. Since 2012, the report says house prices in the provinces have shown little growth. Nana says we need to adjust our perceptions because Auckland is not the wealth base or the driver of our economy.

"We have an inherent discrepancy in the New Zealand make-up. We hesitate to acknowledge, let alone challenge, that we've got a big growing population with part of New Zealand which is Auckland. But in terms of where our economic wealth lies, it is out in those provinces."

Nana says that urban centres such as Auckland inherently create domestic-based jobs. These are relatively low-paying jobs where people spend money back and forth between each other rather than importing wealth from offshore.

"Those Auckland house prices, just in terms of simple supply and demand, are going to be out of the reach of those people on low-paying jobs," Nana says.

But there will always be people who are willing to take low-paying jobs in the city. Their lifestyle may suffer considerably as they have to spend more time and money on transportation. They'll either have to commute into the city or pack into high density housing, like students are already doing.

There are some landlords who will rent only to students because they know students are willing to sacrifice their lifestyle to live close to the universities. A house packed with students can often fetch a higher rental price than one rented to a family.

But Nana points out that we don't create economic prosperity for New Zealand by trading houses.

"Anybody who thinks we do has obviously had the wool pulled over their eyes and are just in Lala Land. You do not improve our prosperity by selling the same house to the guy next door. The house is still the same. It still keeps the rain out the same way. It doesn't improve your prosperity."

Homeowners cashing in on Auckland's high house prices face the challenge of buying back into the market at just as high a price. This could explain what's been going on in areas outside of Auckland since the mid-1990s.

The Reserve Bank bulletin reads: "The upswing in Auckland was followed by subsequent increases in house prices in regions nearby, although the increases in these regions were smaller than the increase seen in Auckland. House prices in nearby urban areas -- Hamilton, Tauranga and Whangarei -- increased soon after they did in Auckland."

As Auckland's population spreads into these other areas, Nana says we need to make sure that we have the jobs and infrastructure to support people who move out of Auckland.

He won't blame anyone for the housing crisis because it is a combination of so many things -- but he can point to some causes.

"In terms of house prices, what we've done wrong is that we haven't had a realistic nationwide economic development framework. We've continued to focus on house prices in isolation to all the other things that are happening in the economy."

He also points to our finance and banking sector that lends for houses and mortgages, yet finds it difficult to lend to businesses.

Nana says that lending for houses is just too easy for the banks because it is not risky. And that comes at a cost to our business development.

Homeowners also share some responsibility for the situation.

"We are a little bit to blame in terms of accelerating that house price spiral. We all wanted to be on the same boat. It's the fear of missing out."

In Wellington, house prices have not gotten out of control largely because the capital has not experienced the population growth of Auckland. Christchurch has experienced strong house price inflation due to the lack of housing stock following the Canterbury earthquakes. But these other centres are still affected by Auckland's crisis.

"Auckland house prices are not an Auckland problem. It's a New Zealand problem. We're all feeling the consequences."

Nana does not believe that rent-to-income and price-to-income ratios can continue to climb.

"Obviously there's got to be a levelling off just in terms of pure affordability. That levelling off is good from a marketing equilibrium prospective. But it's not very good from a perspective of needing to house the population. There is going to be a lot of people out there without a house and in some instances a lot of people without shelter," Nana says.

• David Maida is a freelance writer at DavidMaida.com