Cautious buyers and banks adds to depressed prices

Garnet Road, Westmere, Auckland. Photo / NZ Herald

Is this the time historians will look back on as they debate exactly when New Zealanders fell out of love with residential property as an investment?

Or is it just a momentary wounding of the relationship that will soon heal and allow us to move on as we have for decades into a bright new future of capital gain?

You get the feeling the romance is going, though it's so entrenched in our national psyche you wouldn't bet too heavily on its demise.

But with kites now flying for compulsory superannuation and a Government seemingly determined to change our habits of a lifetime, the residential property market is looking more unappealing by the month as a pure investment.

Not for people looking for a house to live in, but certainly for middle New Zealand with thoughts of following the tradition of investing in property outside the family home to grow their wealth. They drive the demand that triggers capital gain.

A climate today of cautious buyers and cautious banks adds up to depressed prices. While Auckland values are doing a little better than elsewhere and so far are down around 3 per cent on the market peaks of 2007, the bottom may be some way off. Even with the drop - closer to 10 per cent in real terms - and a gentle lift in net wages, prices are expensive by world standards relative to household income.

The miserable number of sales over the past three years - less than half the volumes of the boom times - masks a greater decline than the records show. Many home owners who want to move are holding out for a better price, unable to accept the reality that the market has dropped. In the end, they may have to do so as buyers take advantage of a growing stock of houses.

So the "certainty" of real term capital gain that gave residential property its business case has let us down over the past three years and is looking unlikely over the next few years. The economy will have to be buzzing, with wages on the way up, before decent activity resumes and higher interest rates will be a constant dampener on prices.
At the moment, it's sitting-on-your-hands time.

"Unlike 2008 when the overwhelming negative sentiment of the global economic crisis drove house values down, we are now seeing more of a 'do-nothing' sentiment," says QV.co.nz research director Jonno Ingerson.

QV valuers have noticed that an increasing number of people appear to be shelving plans to buy houses and are instead focusing on reducing debt, he says. As well, some potential buyers are finding it difficult to secure lending from banks, while others feel they are in the driving seat, have time to do their research, and are only making "sharp" offers.

Glenda Whitehead, of QV Valuations, said Aucklanders were adopting a wait-and-see approach - producing a lack of momentum which, with a lack of easy credit, was resulting in easing values.

For all that, there are parts of greater Auckland that are holding up quite well - pockets of the North Shore and the city where a lack of stock is helping to keep prices above the levels of two years ago.

Our quarterly analysis of North Island property values in our latest Property Report, focuses on North Island house price data in the three months to the end of June, shows a number of suburbs which are comfortably up on 2008 levels. Best of them all were Westmere (up 8.8 per cent over the two years), Mt Eden (up 8.2 per cent) and Grey Lynn (up 7 per cent).

The data tables tend to support agency reports there are pockets of brightness across the wider city, and even beyond (to Rodney, for example, where quarterly results showed several areas continued to eat into the ground lost since 2008). Herne Bay and Parnell were the city stars, each up 4.2 per cent for the quarter.

But it was tough going for most parts of the city, with a tide of red figures for the quarter. Only 10 of the 42 Auckland city suburbs listed showed an increase over the three months - and that was the best result for the big local authorities. Thirty five of the 36 Manukau suburbs were in negative territory and it wasn't much better in Waitakere where 13 of the 15 suburbs were down for the quarter. Across the bridge, 28 of the 33 sampled North Shore suburbs slipped in average value judged by QV's E-Valuer.

In the more expensive suburbs values will tend to stay up better because people who can afford to buy there will have high equity and generally don't need to sell unless the price is right. But blue-collar areas can get ahead of themselves in boom times as investors clamber aboard, and have further to fall relatively when times are harder.

Finally, some wisdom from seasoned agent Simon Damerell, co-principal of Ray White Ponsonby who specialises in a prime inner-city patch: "It is quite clear we are going through an uncertain phase in the housing market and it is a time for people to show caution, to learn and try to remember the lessons of the last few years.

"We like reading about the people who take risks and are big winners. But a hell of a lot of others have been truly hurt by behaviour that was sheer crazy - paying outrageous money in a buoyant market when the property was just not worth it. It had to end, and let's hope our memories are long enough.

"As Kiwis we should be obsessed by the fact that property is not galloping up. More than ever, this is a time to search for quality - sound homes in good locations.

"People need to be discerning. If you are an average Kiwi looking, say, in the $400,000 price bracket, be careful, think twice. Don't buy the first house you fall in love with. This is a time for caution."

Well said.

* From the New Zealand Herald's quarterly 'Property Report' - a guide to house prices and great places to live.