Some observations on the Auckland property market
My family are now settled back in Auckland after our sabbatical road-trip and one of the first things to strike us has been the frenzied level of building and buying activity here. Since returning, we have had very few conversations where property hasn't come up and the idea that prices can only continue to rocket ahead and Fear Of Missing Out (FOMO) seems all pervasive.
The intention of this article isn't to make any predictions, but merely to document a some anecdotes that have raised my eyebrows in the last week. As some of you will know, I am an avid believer in valuation (I wrote a piece on the topic here), but am very aware of its inefficiency as a timing tool and am unable to say when this episode might end.
Our first experience was renting a new flat around 3km from the city, in the same area we had lived pre-trip and where our kids go to school. I had, very naively, assumed that without international students arriving to crowd the low-end inner city segment at the start of the year, we would have our pick of places and landlords would be fighting to get us in.
Instead, we found less homes for rent than in any of our previous searches. This can be added to the growing list of economic consequences that have seemed counter-intuitive under Covid (to me, at least). Most places we enquired about were already gone and we considered ourselves lucky to find a pretty basic place in our price range.
Close friends, looking in a higher price bracket, also reported the same surprise at the price and quality of what was available and told us of an open house they had attended with 50 parties showing up.
I have heard people talk about Kiwis returning from overseas pushing up demand, but I'm not sure this explains all of it. There are only limited places in quarantine and the issue seemed to be more the number of rentals available- supply seemed constrained.
Next, my wife's uncle was kind enough to help us move in. He drives trucks for a living, supplying building sites, and he said he has never had a January even close to as busy as this one. He has been working over 70 hours/week along with any of his colleagues who are able. Also notable, was that the abnormal bulk of the business was to renovations and sub-divisions, as opposed to new builds on the outskirts (although there was a lot of that too).
Another friend who photographs high-end real estate for sale and magazines told me he has been turning down business for the first time in his career and others have been being cold-called by local realtors begging for stock to sell.
Since settling in, we have also been struck by the amount of building activity in the trendy inner suburbs. We have been used to a hot market since moving to Auckland in 2016, but what we are seeing seems like a new level. NZ's housing stock currently sits at 4x GDP- a ratio that eclipses many of history's other spectacular property bubbles (US, Spain and Ireland in '08 and Japan in the late '80s).
This chart is not log scale, unfortunately, but the 6x increase in housing value since 2000 is clear. Also, Auckland's median house price/ median income ratio now sits at 10.4x, placing it among the least affordable cities in the world (3-4x is considered affordable, but I doubt that any of the world's major cities would be close to this, at present).
We also found out close friends had bought a new-build townhouse 40km north of town and paid $850k (all figures in NZD), a number that made me wince, until I heard that that the last to sell in the block went for $950k less than a month later. They are at the stage of life where they want the stability of a home and I don't begrudge anyone for that, but the reasons they gave for their rushed decision seemed mostly fear-related.
It just doesn't pass the absolute return sniff-test to pay that much for a cookie-cutter townhouse in a generic estate, where you will be commuting an 1.5 hours to the city each day. Maybe this is an unfair comparison, but I am reminded of the Florida estates that were heavily impaired after the GFC, once the relative-value, greater-fool episode ended.
Also, as unthinkable as it may be in normal times, with interest rates where they currently are, an $800k mortgage is apparently comparable to the modest rent on the flat they were in closer to town. Of course, mortgages can fluctuate over the 30 year life of a mortgage and I shudder to think what may happen to a generation of young people who have stretched themselves to the hilt, if rates even partially mean-revert upwards.
One of the main culprits seems to have been the relaxing of LVR minimums last May, by the RBNZ, in an attempt to stimulate the economy, which has unleashed a monster. And now that the laws are set to be reinstated in March, panic buying has been unleashed amongst buyers who know the 20% deposit they will require to buy the $1m median home, will be almost impossible to save, while also paying rent- it's now or never.
Property sales are also where returning expats could be driving up the market more than rentals, as standard immigrants have to wait to attain Permanent Residency before they can buy, whereas a returning expat can buy as soon as they get off the plane.
Other friends, with young children confided that they are looking for a house, after securing PR, but that they have become dismayed watching house prices rip weekly since November, and have now given up looking in our suburb and are resigned to moving further out, for a hope of a foothold. They told us of lines to view properties and places regularly being sold within a day.
The key point is the speed that prices seem to be rising and building into an all-out FOMO crescendo. I believe it ties in with Jeremy Grantham's recent comments* (a must watch, in my opinion) regarding the necessity of reckless speculative behaviour in not only being a feature, but a cause, of bubble tops.
I am lucky to own a place back in Brisbane and have no intentions of buying in Auckland, but for the benefit of social cohesion, I would like to think that we are nearing the end of this bull-run. However, as stated above, I have no guesses as to how long this could play out for. Valuation is flashing red, but the heady cocktail of low interest rates and rising prices may continue for some time yet.
Caveat Emptor!
Guy
*https://www.youtube.com/watch?v=RYfmRTyl56w
This isn't financial advice. Please do your own due diligence and seek advice before making any financial decisions.