Auckland property crisis

Auckland property crisis

Auckland has gone from the world's fifth least affordable city to its fourth, now trailing only Hong Kong, Sydney and Vancouver as the least accessible housing market.

The 13th annual Demographia International Housing Affordability Survey examined prices to incomes in 406 metropolitan housing markets and put Auckland near the top due to extremely expensive prices but moderate wages.

Auckland's median house price is $830,000 yet residents' median household income is $83,000 giving a multiple of 10, up on last year's 9.7 when house prices were only $748,700 and incomes were $77,500, Demographia says.

Wages have not risen much yet our house prices have spiralled, up 24 per cent in 2015 alone, according to the QV House Price Index.

"Auckland, New Zealand's only major housing market, has a severely unaffordable 10 median multiple," Demographia said.

Since 2004, when the first survey was conducted, Auckland's unaffordability measure had nearly doubled, from a multiple of 5.9 to 10, it said.

1. Hong Kong $5,422,000 $300,000 18.1

2. Sydney $1,077,000 $88,000 12.2

3. Vancouver $830,100 $70,500 11.8

4. Auckland $830,800 $83,000 10

The median multiple is not a perfect measure because it does not account for house sizes or build quality. housing markets. For example what you get as an average house in Auckland is likely to be much larger than in somewhere like in London or New York.

But it is the only index that allows a quick comparison of different

So why have Auckland property prices increased so much? I consider a number of reasons below and conclude with how I would play the Auckland property market.

Under supply

The population in the city has gone up by 45,000 a year. We need about 15,000 extra houses a year and are only building about half that number.

Auckland Council has addressed the problem of not having enough land to build on with the Unitary Plan which, once the appeals process is dealt with, will enable the construction of 422,000 housing units on brownfields developments and 150,000 units on greenfields sites. That should provide an ample supply of land which is the highest cost factor in Auckland housing.

While I agree with the analysis there is undersupply of land being consented for properties I don't necessarily agree that under supply is the core reason for property prices increasing.

Undersupply of housing should also increase rental yields as excess demand pushes up prices. As renting and buying a house to live in a substitutes for accommodation both should had significant prices increases however rental price increases have lagged propertry increases quite substantially as rental increases seem to be tied more to increases in peoples incomes.

I have estimated that the median house price in Auckland has increased by ~12.3% p.a. for the last 5 years but rental income has increased by ~4.7% p.a.

The under supply issue is being addressed through the new unitary plan which will allow subdivision of properties that were previously too small to be subdivided. Furthermore it will allow higher density and more terraced and apartments to be built in areas that previously had density and height restrictions.

The other factor that could increase supply is the move of baby boomers out of their existing houses and into retirement villages and aged care facilities. There is an upcoming shortage of aged care beds especially and to a lesser extent retirement villages, however this should open up more inventory of houses that will be available as these residents transition away from their family homes to aged care accommodation.

Lower interest rates

The low interest rates that have been depressed since the aftermath of the GFC have enabled borrowers to borrow a larger amount than they otherwise would be able to service if interest rates were at the levels prior to the financial crisis.

Low interest rates have increased the attractiveness of borrowing and subsequently resulted in large amounts of credit growth which has further increased the price of property and also other financial assets.

If interest rates do moderate this will cause stress for some borrowers as their incomes are unlikely to increase at the same rate as their interest payments on their mortgage increase.

This may lead to a forced sales of property which could have a domino effect on reducing the value of property stock across the market, increasing the loan to value ratios and putting many borrowers in breach of their loan covenants.

Safe Haven demand

There is an argument that property  is being used by offshore buyers as a store of value and opportunity to remit funds from their home country into New Zealand and other countries because of the instability and potential currency devaluation and their own country.

It is difficult to predict this demand and also hard to control as many of these buyer's are cash buyers and are not influenced by local interest rates or LVR restrictions.

One way to tackle this problem is by introducing restrictions on foreign ownership of properties or increasing the tax burden for offshore buyers in purchasing properties in New Zealand through additional taxes such as a stamp duty.

Tax considerations

In New Zealand the treatment of housing is quite favorable in that losses are able to be deducted against your personal income tax and capital gains are not taxed. Transaction costs are also relatively low compared to other countries. Although this treatment is not dissimilar to other asset classes, property is unique in that it is relatively more stable and therefore can afford a higher amount of leverage against it of which the interest is tax deductible. Therefore investors may not be as concerned about making losses due to high interest deductions  as they received a tax benefit in doing so.

Unitary plan

This factor has not been publicised as much as the above considerations, however I think it is very relevant that for many properties in Auckland use of the land has become more valuable as they can now be subdivided and a higher density accommodation built.

It is difficult to quantify the extent of this increase and the increase in value through subdivision will potentially be offset with valuation falls through higher supply in the market over time. However, it is clear that properties that have benefited from zoning changes have become more valuable. For example, two dwellings could be built on one original section and the level of income produced from the same original size section has now increased to what was achievable previously.

If there had been rezoning the values of the same properties are unlikely to have increased as much.

Valuation

When viewing property I tend to consider it similar to other asset classes and for capital gains to be achievable earnings have to increase. Generally over the long-term assets valuation will depend on level of its output or the level of income the asset produces.  As rental income has fallen far behind price rises over the last 5 or more years either rents will need to start increasing faster than house prices (this will have to be be linked to income increases) or interest rates will have to fall further to justify prices continuing to increase above the rate of rental increases.

I think the former scenario is more likely than the latter scenario especially if there is a true shortage of accommodation properties in Auckland.

The difference with real estate  compared to other assets  is land is finite and as populations grow this will become more and more scarce. Therefore potentially land is viewed as more of a store of value like gold than an income producing asset.

Preferred investments

My preferred property investment would be large land holdings where I can also take advantage of good yields from renting many dwellings or warehouses on the site and benefit from the appreciation in the value of the land as it becomes more scarce.

The two ways I would look at achieving this is by owning large areas of land just outside the city limits or residential properties within 15km of the CBD that have large amounts of land and could potentially be subdivided and the third way would be to own industrial warehouses that sit on large amounts of land and will likely benefit from increasing Urban sprawl and also the increasing use of logistics as a means for distributing products purchased online .