Are house prices at a cross roads?

iStock 000005678412Medium(copy)(copy)(copy)(copy)Much has been written about Auckland house prices being over-valued and the debate has raged around whether the fundamental drivers of Auckland house price increases will keep prices heading up, or whether this continuous rise in prices will reach a ceiling where people just cannot afford to buy anymore. The rest of New Zealand has felt isolated from this debate as it just seemed to apply to those in Auckland. However, two recent reports signal that the danger levels for both Auckland house prices and those in many other cities and towns around New Zealand, have increased significantly and we could be at a cross roads for house prices.
Should we care if house prices in Auckland fell?

A dramatic fall in Auckland house prices could have a massive flow on effect across sectors of our economy.
  • Those who had recently purchased a house at an inflated price and with minimal equity could see their equity wiped out. Some of these people may be forced to sell their properties as their lending ratios would have been breached.
  • Rising property values creates a ‘feel good factor’ for those who already own properties. If an owner sees their property value fall, then the ‘feel good factor’ dissipates and they stop spending. This can lead to an economic contraction in many sectors of the economy.
  • Many New Zealanders use their house as security for loans and guarantees. If house values fall dramatically, then some of these guarantees come under threat. Banks may become reluctant to lend small businesses money at residential rates if the owner has a highly leveraged property. This could lead to a slow-down in the small business market.
  • Some of the recent provincial house price appreciation can be attributed to Aucklanders selling and moving to lower house price areas. If Auckland house values fall, then this migration to the provinces will slow - resulting in no or low growth rates in those towns which had previously seen good increases.
Mixed messages create confusion

We need to be clear around who is saying what as many commentators have vested interests in the message they promote. Those involved in selling houses obviously want to see values increase as it is good for business. The government would like to see a stabilisation of house prices as a massive housing crash is a major negative when it comes to trying to win an election. There are others who have investment vehicles that compete with residential rental property and would love to get a slice of the money that has been pouring into property in recent years.
The monthly real estate figures for the last quarter indicate that prices have started to peak with some months showing declines while other months record gains. Additionally, these price changes are far from being consistent across regions, cities and suburbs. Looking at the average house price movement is no longer a reliable indication on what is happening to house prices in your local area.
Despite the mixed messages, there are two recent reports that are well worth while noting. These are:
  • Reserve Bank of New Zealand Financial Stability Report dated November 2015.
  • First NZ Capital NZ House Prices Research Report published 20 November 2015
The Reserve Bank report indicated that the interaction between low mortgage rates, high household debt and increasing house prices poses a significant threat to the financial system. The Reserve Bank reported that house prices across the Auckland region increased by 27 % over the past year and the price to income multiple for Auckland has increased  to 9.2 - up significantly from 6 in 2011 - making Auckland one of the most expensive places in the world when measured against income levels. The Reserve Bank stated that there is now an increased potential for house prices in Auckland to fall.
The First NZ Capital report is more detailed around house prices and reports that NZ house prices are significantly overvalued by around 30-40% - with Auckland being even more overvalued than that. They conclude that there is an increased chance of house prices falling - especially in Auckland - and that the magnitude of the fall could be in the vicinity of 11%. The quantum of the fall is based upon their analysis of the past five house price cycles.
What does all this mean for you?
  • For those looking to purchase their first home or have sold and are waiting to buy again: Patience will be a virtue and based on the reports mentioned earlier, house prices may fall or at best move sideways for the next 12-24 months. A few bargains may appear for those prepared to wait.
  • For those who have to sell over the next 12-24 months: Speed to market will be your potential friend.  Consider selling sooner rather than later.
  • For those who do not have to sell but want to sell and buy again: Prudence will be a virtue.  Don’t lock yourself into a new house purchase and then try and sell your existing home as you may find it takes longer to sell than previously plus if you are in a hurry to sell, then the price you get may be less than what you expected. In this part of the property cycle, selling your home at the price you want and having a long settlement period is the ideal scenario. This hopefully locks in your existing house price at a higher price than what it will cost to purchase your new home (assuming you are buying like for like). A prudent investor needs to be a realist and be prepared to meet the market by dropping your sale price or else deciding to sit tight until prices eventually recover to the value you believe your house is worth.
If you would like advice specific to your circumstances, contact your Milestone adviser.