What our new government’s policies could mean for the NZ housing market
We have all seen the headlines telling us that Auckland house valuations for council ratings purposes have on average increased by 46% over the past three years. Most people have also probably taken a look to see by how much their own property has gone up in price.
What could be the economic impact of these numbers virtually (but not definitely) confirming a rise in wealth for Auckland property owners?
Will this new wealth mean more spending by Aucklanders?
On the face of it one might think that because people on paper are wealthier they will choose to splurge some of their new wealth on things like holidays or cars. Ahead of the global financial crisis one of the forces believed to lie behind sometimes fast growth in consumer spending was rising property valuations.
But further analysis suggests that some of the spending growth simply reflected strong wages and jobs growth associated with a building boom in some countries. Since the GFC the evidence supporting a large spending effect from rising property asset prices has been limited.
What does it mean for those with increases over 46%?
For most property owners in Auckland the jump in valuations is either meaningless or potentially a negative. For those experiencing a price rise above 46% there will be a greater than average rise in council rates from the middle of next year. This will especially concern the older generation who are probably in older suburbs located closer to the city centre where gains have been quite strong.
Some of these asset-rich but potentially cash-poor people will need to discuss a rates deferment scheme with the council. Others might think of shifting – but that is where we get to the real crux of rising house prices. Very few people sell their house, move out of Auckland, and therefore free up a large amount of cash for spending on other things such as more travel in retirement.
Does anyone really benefit from these higher valuations?
Only those downsizing or shifting out in future years will truly see wealth benefit from their higher house price. Those shifting within Auckland will usually end up in a net zero position. Actually, many will end up worse off because of the larger mortgage relative to income which they will have to take on to move to a higher grade of housing (size, quality, or location).
Who will be unequivocally better off? People who do retire elsewhere, and people who might have only ever been in Auckland temporarily and know they can sell without needing to hold their cash in ready form in case they have to or choose to move back in again. And investors – those with housing assets they are not personally living in.
What about property investors?
Will investors look to sell now that they legitimately feel wealthier? And do what with their money? Put it in a term deposit to earn 3.6%? Some will, probably those of more risk averse nature. But we humans tend to be backward looking and we think that if a thing has happened many times in the past it will happen again in the future. So almost all investors are likely to continue to hold onto their property in anticipation of future capital gains when the next upward leg of the cycle comes along – perhaps near the time of the 2021 America’s Cup.
In truth, the economic impact of the 46% average rise in council valuations is likely to be un-noticeable if it exists at all. And if it is noticeable then it will be in locations outside Auckland to which some people may shift. But even there, it is very unlikely that many of these shifters will find the 46% valuation rise as fresh news. Newspapers have been filled with data showing escalating Auckland house prices for many years.