3 December 2009

Recent commentary on New Zealand’s property market claim that it is showing renewed strength with prices back up near levels last seen at the height of the property market in 2007.  However, although there are many positive signs, the suggestion that the property market is booming is really not supported when one examines the market place.  It is important to understand what is driving those property prices up.

Data from the latest New Zealand Property Report showed that nationwide inventory of property for sale has increased in November with 13,857 new listings – up from 13,550 in October.   But, to put this increased new listings figure in perspective, they also reported that over the past twelve months there has actually been an 11 percent fall in listings compared to the same twelve-month period spanning 2007/2008.   This fact supports the perception among property experts that supply of properties for sale is still very tight, which in turn puts upward pressure on property prices.

Another positive sign is the rate of sales, which has seen a ten percent increases on the prior twelve-month period – still down 31 percent on the 12 months to October 2007.  This reflects a steady and stable buying environment and thus, it is fair to conclude that speculation is not putting a great deal of upward pressure on the Auckland Property prices.

That leaves that all-important factor that influences house property prices – namely the right supply of new inventory in places where people want to buy.  Where this is out of balance prices will increase, especially where the supply of existing properties coming onto the market is tight, as is the current position.

On one hand, the national average indicates that there is growth in new listings with 36 weeks of estimated supply, up on the 31.5 weeks in June this year.  However, the New Zealand Property Report points out that the increase is not evenly spread across the country with the major centres actually seeing further decline, whereas provincial NZ is seeing significant inventory increases.

Whilst there are a number of factors one can point to for this trend, there are two that the property investor would note.   One is the fact that in times of uncertain job security, people tend to migrate to the main centres where employment opportunity is greater.  The second is the exit of fringe speculators who tend to be more active outside the main centres where property is cheaper in boom times.

These trends point to the fact that without substantial new housing inventory in the main centres there will be a continuing upward pressure on prices.  Pressure on inventory leads to increased expectations from those with properties in areas of high demand.  Over the last 3 months the country’s median asking price has been boosted to $419,586 – up 3.6 percent on November 2008.  The percentage increase is even higher in the main centres.

The New Zealand Property Report notes that:
“The price rise in Auckland of 4.1% is a direct result of the tightness of the market with inventory levels remaining tight as the flow of new listings seems to be being met by a steady demand. “

One prominent Auckland Real Estate Firm also reported that their median sale price for November was the highest in 23 months. Upon noting that their average price has increased for the third consecutive month, they suggest that:
“The level of activity and strength of prices in the housing market is a strong signal that in Auckland at least property has returned to being seen as a sound, medium to long-term investment option.”

The Institute of Economic Research cautions that “House prices are showing renewed over-valuation”.   However, the Real Estate Institute of New Zealand argues that the signs point more towards a fairly balanced market environment.  It notes that using the Reserve Banks’ stratified house price index, the current (Oct 09) price in Auckland is $480,510 against a peak in July 2007 of $510,197.
- so we are still currently 5.8 percent below the 2007 peak.

What does this all mean for people looking to buy or sell property?  As there is no over supply of property or evidence of high speculator activity in the main centres, property values will remain stable and, more likely, steadily increase depending on the neighbourhood.  New property in sought after areas should experience a higher level of demand with a more rapid turnover than has been experienced over the last 18 months.  The speculative oversupply of housing that has so plagued other international markets is clearly absent in the case of New Zealand property in general and, in the main centres in particular.  Like all things, the level of understanding of the local variables can make for a good or bad decision, but the fundamentals support current and long-term investment in the property market, especially in the main centres.

Ref:  New Zealand Property Report, NZ Herald, REINZ