One of the cleverer Kiwi brains, belonging to Tony Alexander, Chief Economist at Bank of New Zealand is regularly applied to analysing the housing market and had some interesting things to say in a recent column in New Zealand Property Investor (April 2014).
In the wake of consecutive Official Cash Rate increases, some commentators are predicting a slow-down and there are media reports of the LVR restrictions reducing the number of buyers in the market...
Will rising interest rates lead to a slow down in the housing market? The Reserve Bank hopes so. But Mr Alexander notes several things.
- Net migration inflows are still increasing and look to remain that way for a couple more years. That means more people looking for accommodation;
- The economy is heating up and producing jobs growth which will lead to faster wages growth which leads to more people who can afford to buy a home or want to upgrade;
- Construction costs will rise sharply, and new house supply will be constrained due to a shortage of builders – which will impact positively on the prices of existing house stock;
- Demand from offshore buyers, particularly in China, continues to grow.
Even with the LVR rules in place (and there have been suggestions that the restrictions may be loosened or even dropped next year) these factors suggest a continuing rise in property prices over the next 3 years. Infometrics, an economics research and forecasting group has recently suggested that house prices will skyrocket in 2015/16 with house price inflation peaking at 14%.
And we are starting to see indications of this in the Auckland apartment market. Leaving aside discussions about the morality of shoebox apartments or who should be allowed to purchase property in New Zealand, here’s what we think....
If you are interested in investment, buying Auckland apartments (the right ones) is a good proposition. As well as potential capital gain (see above), returns are good ; a return of between 6.5-10% is not unusual.
If you are renting and want to get on the property ladder, buying an apartment is a good proposition. Rents are not going down. And a deposit amount will represent a significantly higher proportion of the cost of an apartment than of a typical Auckland house (Average price March 2014 $678,000). For example, if you are paying $400 per week in rent and you have a deposit of $50,000, you can afford to buy a property for around $253,000 according to Westpac ‘s “What could my rent get me?” calculator (2 May 2014). So, why not buy and take advantage of the potential capital gain (again, see above).