How did Auckland’s residential property market perform in 2019?

Despite hitting property owners with a veritable selection of legislative, monetary and policy changes, the year 2019 has still managed to welcome first home buyers and property investors back to the fold, following a prolonged hiatus in 2018.

Bayleys property reporter Katharina Charles talks to Nick Goodall, head of research at CoreLogic to find out how the City of Sails’ residential property market performed this year, and what clues this might hold about the new decade.

The Year in Review

“Opening with a feeling of uncertainty, during the first quarter of the year we heard lots of discussion about the effects of new policy – most notably how changes like the foreign buyer ban, healthy home standards, bright line test extension and the potential for further legislation was poised to affect the property market,” Nick says.

According to the Real Estate Institute of New Zealand’s (REINZ) Housing Price Index (HPI) sale values across Auckland dipped 2.9 percent year-on-year in March. The month also saw a significant 18 percent drop in the number of properties sold – the lowest figure since 2008.

This soft performance can be largely attributed to widespread uncertainty across the market.

“The calendar year might have begun in January, but the residential property market did not get the desired fresh start, with both buyers and sellers adopting a ‘wait-and-see’ approach in regard to new policy.

“While the Reserve Bank of New Zealand (RBNZ) encouraged buyers by loosening loan-to-value restrictions (LVR), speculation about the Tax Working Group’s (TWG) findings in regard to a Capital Gains Tax (CGT) dominated property chatter during the first quarter of the year,” Nick explains.

The proposed CGT which was recommended by Sir Michael Cullen’s TWG, would have seen profits made on rental homes, second homes, land, shares and business assets subject to additional tax from the year 2021.

While many wrestled with a fear of the unknown, certain pockets of Auckland emerged as performing better than others.

“Lower value suburbs such as Otara in South Auckland for example, saw prices increase by five percent year-on-year in March, while values across the pricier North Shore suburbs recorded corresponding dips.

“This can be a signal of unaffordability, but at work in the background we were really seeing conservative serviceability testing by banks impact borrowers’ ability to purchase.

“While interest rates hit record lows, the technical service rate by which bank’s measure a person’s ability to repay their loan, are several percent higher.

“Stricter expense testing adds another layer of criteria for a mortgagor to satisfy, thus making homes sold at a higher price point harder to purchase,” Nick explains.

In terms of value, vendor expectations also played a big role in the stalemate between buyers and sellers over this period.

Following the dizzying heights of the last market peak, some sellers found it difficult to reconcile slower capital growth, leading to a disparity between what the market was willing to pay, and what sellers wanted to accept.

In April, the RBNZ announced that a cut to the OCR in May would be necessary, while values in Auckland continued to fall 1.5 percent year-on-year.

“May signalled a turning point for Auckland’s property market,” Nick states.

“Not only did the RBNZ slash the OCR by 25 basis points to a record low of 1.5 percent – kicking off the second round of mortgage wars and releasing a wave of positive sentiment, but Prime Minister Jacinda Ardern officially ruled out implementing a CGT.”

Slowly but surely, the market began to move, driven by first home buyers who made up almost 24 percent of the country’s buyer market – the highest percentage on record, according to CoreLogic’s Buyer Classification Data.

“During the third quarter we saw the number of new listings pick up in Auckland,” Nick says.

Despite this, activity remained lacklustre, driven by continuing credit constraints, though first home buyers seized the opportunity to enter the market during a time of relatively low competition.

Following a shocking 50 basis point drop in in the OCR in August, both values, volume and activity across Auckland’s residential housing market began to lift, which has attracted property investors back into the fore.

“Where banks took encouragement from improving debt-to-income data; relaxing serviceability testing, there has been an uptake in both speculative activity and buyer demand which has directed a lift in the market over the last quarter of the year,” Nick says.

“While the RBNZ expects subdued economic activity to year-end, in the latest Monetary Policy Statement Governor Adrian Orr foresaw growth come 2020, with housing inflation tipped at five percent.”

Looking Ahead

While this time last year we were concerned about the impact of the Government’s foreign buyer ban, we are now facing the new year with a little more certainty.

“Our foreign buyer data showed that while Auckland’s central apartment market felt the exit of foreign capital, the rest of the city experienced very little change as gaps which may have been vacated by foreign purchasers were easily filled by first home buyers,” Nick explains.

“Looking to the new decade, investors are back in the market; with a comprehensive CGT ruled out as well as healthy homes standards not as frightening as they once were.

“These factors, paired with encouraging sentiments from the RBNZ and rising sale values, offer a pretty positive feel across the market – with little chance of a regression any time soon,” he adds.

Where some have picked the OCR to drop further, Nick expects to see upward pressure on interest rates given bank projections which see a rise of one percent in the long-term. Though, he says, the impact of this is likely to be spread over one to three years.

The big question for the year ahead however, centres around the 2020 general election; scheduled for November 21.

“As we have learned from 2019, markets do not enjoy uncertainty and a general election always adds an element of that to the mix,” Nick says.

“Election year promises usually yield some interesting considerations for taxation and housing, but with a CGT off the table, and landlords the subject of recent regulatory changes, we expect the focus will come back to affordability.

“While debt-to-income data is relatively new, the long-term trend has shown roughly one third of Kiwi households borrow more than five times their annual income, which is certainly on the radar for fiscal policy-makers.

“Despite signs this trend has slowed, we have seen household debt start to wind up again over the last three months, which if it were to continue would add impetus to the use of macroprudential tools,” says Nick.

Overall however, Nick thinks the outlook is pretty positive for those in Auckland’s residential market.

“In light of global economic softening and the low interest environment, fiscal policy will continue to focus on stimulation.

“Because household wealth and the equity created by residential property investment are enmeshed in business confidence and spending, we can look forward to favourable market conditions, so long as household debt levels remain sustainable,” Nick says.

Read more...