ANALYSIS: During the first three months of this year the average level of house prices in Auckland fell by more than any other region in the country. Prices declined by 4.1% from the average level during the December quarter of 2021.
Why are prices falling so rapidly in Auckland and will this pace of price decline continue? One reason for the sharp decline is the above average 6.2% jump in Auckland house prices late last year compared with an average gain of 5.5% outside Auckland over the same period. On that basis alone we would have to be wary not to over-extrapolate the decline.
Another reason, however, is likely to be buyers starting to react to the surge in new home construction in Auckland. The number of consents issued in Auckland in the past year is running twice “normal” levels, compared with the average for the past decade, But in the rest of the country consent numbers are just 57% above the 10-year annual average.
There is also the issue of population growth. In the June quarter of 2021 Auckland’s population was 0.1% lower than a year earlier. But the rest of the country saw population growth of 1%. Migration out of Auckland to other places helps account for this along with Auckland being the city into which most migrants and many expat Kiwis go when they enter the country.
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The chances are good that in the year to June another small decline will be recorded and that is why I’ve been warning for some time that these divergent new house supply and population-driven demand trends will have a price impact.
Economist Tony Alexander: “Auckland is actually sitting below trend compared with the rest of New Zealand.” Photo / Fiona Goodall
But will that impact be severe? The argument that it will could centre around the just-starting brain drain of young Kiwis overseas hitting Auckland more than other regions. There is also the extra hesitancy one would expect on the part of prospective buyers in light of an increasing number of development project failures and rejiggings which buyers have to pay for.
The high mortgages people have had to take on to purchase a property in Auckland in recent years bespeaks of greater cash flow exposure to higher interest rates and more less than willing sellers than elsewhere in the country.
But there are some strong supporting factors. One is that a lot of the consents issued for new supply will not be acted on because the developers will fail to generate enough presales to meet financing requirements set by their bank and non-bank funders.
Another is that there are at least 165,000 migrants set to gain the special Covid residency visa in coming months and most of those people will live in Auckland. They are not all in a position to purchase a house, but some will be and that will add to demand more than in other regions.
Finally, average house prices in Auckland have risen by 40% in the last five years. But outside of Auckland they have risen by 80%. Based on long-term price comparisons, Auckland is actually sitting below trend compared with the rest of New Zealand.
That doesn’t mean prices can’t keep falling. But it does mean there is a headwind pushing back against those falls. A similar thing is happening in Canterbury, because of the post-earthquake repricing catch-up to be done; in Queenstown, because of the boost coming from foreign tourists returning; and in Tasman and Nelson regions because their price gains since 2017 have also been below average.
There is also one final thing to keep in mind. Historically, Auckland’s housing market changes and then other markets follow at highly varying paces. Perhaps that is all that is happening now.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
