Don’t assume prices will keep rising - ANZ

ANZ chief economist Cameron Bagrie

ANZ has just released its latest Property Focus report and it takes on the assumption that Auckland’s supply shortage means house prices are set to rise further.

Estimates of the extent of the shortage vary, but ANZ estimates that Auckland is short of 20,000 to 25,000 new homes.

At the same time, Auckland is experiencing very strong population growth of around 11% over the past five years, as compared to 5% around the rest of New Zealand.

ANZ chief economist Cameron Bagrie said this supply-demand imbalance does support a view of rising prices.

“The problem is that rents haven’t aligned to the shortage thesis. Auckland rents have risen 25% since 2011 whereas house prices are up 77%.

“Credit, liquidity, low interest rates, and speculative behaviour have also been key factors driving prices higher.”

That means house prices in this cycle have been heavily influenced by interest rates and credit.

But a rising trend in mortgage rates, the Reserve Bank LVR’s, and tighter bank rationing of credit means that these factors are set to be less supportive of prices going forward.

Bagrie said that for the market to become balanced again it will be necessary to get the supply-side response right - with Christchurch a good example of how the market responds when supply adjusts.

To do this, there are many issues to address, including land costs, development costs, and how necessary infrastructure is going to be funded, along with planning issues and consents processes.

“Intensification needs to be a reality, but is constrained by NIMBYism. Construction costs are also prohibitive and are bringing into question the ‘economics’ of some developments.

“New Zealand needs a lot more 100 square metre houses and not 200 square metre ones: the trouble is that land costs do not justify putting a smaller, affordable house on a section.”

Falling house prices and rising construction costs could spell trouble for the development market, Bagrie added.

REINZ data shows Auckland house prices are down 4% and in some suburbs they are anecdotally down 10%, he said.

“You take price falls of 5 to 10% and construction costs rising over 8% and, whammo, you have no, or even a negative, margin.

“If we look at a different measure of construction costs – the value of consents per square metre – which has bobbled around between 10-15% per year, the story is even more worrying.”

Read more:

Sales down but life in market 

Falling consents mean shortage not addressed