Unique cycle may have surprises in store

Investors beware: Auckland’s current property cycle is different to past cycles but it won’t last forever.

Tuesday, November 10th 2015, 1:00PM

by Miriam Bell

Auckland’s housing market has been running hot, with ongoing price rises, for months now.

There is some evidence that its record-breaking run might be winding down, but landlords.co.nz spoke to a range of experts who all agree this cycle is different to those in the past.

This means that market predictions are not easy and there could still be surprises in store.

Veteran property investor Olly Newland said he has seen many property market booms and busts in the past.

“But this one is completely unlike any I have seen in my lifetime. This is partly because we have seen such a prolonged boom.”

In his view, the boom period began before the GFC and the GFC itself simply led to a flat blip in the market from which it quickly picked up again.

“Most boom periods only last for two to three years, but this one has gone on for two or three times longer than that.”

The cycle has been driven by historically low interest rates, which Newland said New Zealand has not seen the like of before.

“That change in the level of interest rates – which is effectively cheap money - has had a big impact on property buyers. And, as interest rates remain low, so the boom goes on and on.”

It would take a catastrophic overseas event for a crash in the market to occur, he said.

“If that was to happen, I think that most investors would just do what they did during the GFC – which was wait it out, and not buy or sell for a time. Only a tiny minority would end up being forced to sell.”

Newland said that, hopefully, the residential market will simply peter out at around the level it is now at and become a more regular market again.

“Even if the market has slowed already, there is still plenty of money to be made in property.

“You’ll continue to get capital growth – just not at the same level or pace. There’s always the option of adding value to properties. And the commercial property market is primed to boom.”

The well-recorded supply and demand issues at play in the Auckland market also mark out the current cycle as different.

NZPIF executive officer Andrew King said net migration numbers are far higher than in other cycles, while building is far lower, so supply and demand are way out of balance.

“This is changing in Auckland, but quite slowly… And there is a potential problem in that we gear up to build a lot more, they are suddenly approved and built and then we end up with an oversupply.”

For this reason, the country’s property market growth has just been in Auckland for a few years now, whereas usually it would have rippled out to the regions before now.

King said supply and demand issues have also affected the Auckland rental market.

“Rental prices can be static when house prices grow, but rents in Auckland have increased quite a bit over the last few years. Not as much as house prices, but still quite significant growth.”

This is likely to be due to overcrowding in Auckland rental properties, he said. “There is no slack in the supply and so tenants are finding it harder to seek cheaper rental options.”

Like Newland, NZ Property Institute chief executive Ashley Church thinks Auckland’s current cycle is unique compared to those he has seen before.

This is because it is so closely related to genuine demand in the market.

In the past, property booms have been more speculative – based on overseas markets, consumer confidence, and economic cycles – and the demand has been fuelled by speculation, Church said.

“But this boom has been about strong net migration into the city, which has badly underestimated the planning requirements needed to meet that demand. And now the chickens are coming home to roost with a significant shortage of housing.”

While most property cycles only last three to six years, he believes this one is likely to go on for about 10 years.

This means that if this cycle is defined as having started around 2011, it won’t start to ease off properly until about 2020.

Church said this is unfortunate for first home buyers, but 65% of Aucklanders already own their own home so the growth situation is good for the majority of people in the market.

However, the current situation is not sustainable in the long term, he said.

“People need to bear in mind that this market growth will not go on forever. Incomes will need to catch up to house prices more. And when this impacts, it will slow.”

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