Watch out with regional bargains

BNZ chief economist Tony Alexander

Not only are Auckland’s hefty house prices leading to widespread consternation, but they are causing growing numbers of people to question purchasing property in the city.

Two recent polls (conducted by UMR and SSI respectively) have found that an overwhelming majority of respondents believe the city is firmly in the grip of a housing crisis.

The UMR poll also found that a majority of respondents, including homeowners, thought Auckland’s house prices needed to fall to varying degrees.

Throw the Reserve Bank’s latest investor-targeted LVR restrictions* into the equation and it’s no wonder many investors are looking away from the Super City.

The new LVRs mean investor loan requirements have been standardised to a 40% deposit nationwide, but many regional markets offer significantly lower prices than Auckland’s market.

Buying regional investment properties has long been a tried and tested strategy, particularly for those taking their first steps on the property ladder.

Regular media reports of low cost housing markets in areas like Kawerau or Port Waikato add to the sense that simply buying a cheap regional investment property is the way to go.

However, as landlords.co.nz reported earlier this year, investors need to tread carefully when buying regional “bargains”.

BNZ chief economist Tony Alexander said history tells us that at this point in the housing cycle people tend to invest in the regions with an eye on bargains, smaller mortgages, and better yields.

Such investing is usually with a view that there will be a population surge in the regions as Aucklanders flood out of their expensive city and baby boomers retire to their beautiful location, he said.

“This never happens to the degree people expect. Worse than that, there are many parts of the country where short of Mount Rangitoto blowing up population is not going to grow at all.”

Alexander said that in some of the locations featured in the media recently with people buying very low priced properties the population projections are for rapidly declining populations.

People looking at investing in regional housing markets should do so with full awareness of how local population pressures are likely to develop, he said.

To this end, he suggested using Statistics NZ Population Projections.

It shows that Auckland, Canterbury, Waikato and Bay of Plenty are all projected to have strong population growth out to 2043.

But the West Coast, Southland, Gisborne, Manawatu-Wanganui, Hawkes Bay and Marlborough statistics show no or minimal growth projected out to 2043.

Further, Alexander said that while most regions are projected to have some growth, not all local authorities are.

Regional property buyers would be advised to pay attention to this before selling up in Auckland to buy a few houses elsewhere thinking that capital gains will be the same, he said.

*The LVR restrictions are due to come into force on October 1 this year.