What could intensification mean for investors?

Tuesday 18 August 2015

Intensification could halve the over-valuation of Auckland housing prices but improve potential income streams, according to a new report by the NZ Institute of Economic Research (NZIER).

By Miriam Bell

Prepared for the Auckland Council, The Impact of Intensification on Auckland Housing Valuations suggests that intensification under the Unitary Plan might be a factor supporting Auckland’s high housing prices.

NZIER senior economist Christina Leung said the potential for intensification of the land means it is worth more, given greater future income streams under intensification.

Anticipation of this drives up housing values.

This means that Auckland’s current prices are not necessarily a sign of market failure – they might reflect higher potential rental earnings streams and capital values.

Leung said the report first compares current Auckland house prices with what the "fundamental" price should be if no intensification was to take place.

It then looks at what the "fundamental" price would be under various intensification scenarios.

“The estimation of over-valuation is based on the assumption that intensification takes place, and within ten years,” Leung said.

However, the report’s modelling shows that, eventually, intensification could halve the over-valuation estimated for Auckland.

The largest impact would be on the North Shore and in central Auckland where the potential for intensification is highest.

The report also suggests that, under current construction and other cost structures, terraced housing and high-rise apartments present a better prospect for returns than medium-rise developments.

Leung said that if medium density developments dominate intensification the "fundamental" value of the land is essentially less, which means current prices are more overvalued.

For this reason, NZIER would expect higher density developments to take the lead over medium density developments as Auckland’s intensification unfolds.

Leung acknowledged that there is a lot of resistance to intensification at the moment.

“But if you look at the trend in building consents issued it is shifting away from houses towards apartments and townhouses.

“There is a growing recognition that intensification is necessary to address the housing shortage.”

For investors, intensification could pay off.

APIA president Andrew Bruce said investors who own property in areas zoned for intensification could choose to maximise the value of the property by developing it.

For example, an existing standalone house on a suitably sized section could be removed and replaced with several townhouses.

Bruce said that limits on building in the past has contributed to the SuperCity’s current dwelling shortage and intensification was one way to address this.

“Looking at it from a broader Auckland perspective, it would be naïve and selfish to oppose intensification.

“Auckland has a growing population. There has to be changes but, unfortunately, not everyone will always be a winner.”

While some people are simply opposed to intensification in principle, others are concerned about the impact of increased traffic and shading on their property and/or their lifestyle, he said.

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