How price cuts and offshore funding are impacting the Auckland housing market

June 13 2017  |  3 min read

One does not have to look hard nowadays to find evidence that the Auckland housing market has slowed down in terms of the number of dwellings being sold, the average time taken to sell a dwelling, the number of listings (up), and, of course, prices.

The most up-to-date price gauge comes from the Barfoot and Thompson data which shows that in the three months to May average sale prices were ahead just 2.1% from the three months to February. In the same period one year ago, prices rose 4.5%, two years ago 6.2%, three years ago 5.5% and four years ago 5.7%.

This gives us a better feel for what is happening with prices than simply looking at the annual pace of change, which was 8.2% on a year earlier. Broadly, prices have been almost flat since the September quarter of last year. That means that in some cases prices have gone down.

Which types of houses are vulnerable to price declines?

The first point to note is that at the top of a price rise cycle, all houses are vulnerable to price cuts as vendors realise they can no longer rely upon panicked buyers paying for whatever they can get their hands on. But furthermore, there is a risk of increased sustained price declines in areas where buying has been driven predominantly by investors. The chances are that in Auckland this is the lower socioeconomic zones, where first home buyers may have been turning their noses up at the stock (and location) on offer.

Investors buying for speculative purposes need new end-buyers or other investors to come along. But many buyers have been taken out of the market by the LVR restrictions. Many investors have also left the market because over the past six months banks have aggressively tightened up their lending rules. This tightening is likely to intensify and here is the main reason why.

How the GFC affected lending

Ahead of the GFC, banks were funding about 45% of lending to Kiwis by borrowing from foreigners. This was fine until the GFC made investors want to keep their funds close to them in the likes of the UK, South Korea, Switzerland etc. Banks became unable to borrow new funds or even replace maturing borrowings.

Since the GFC, the risk of a credit crunch has been mitigated with more funding onshore and up until recently, relatively weak credit growth. Now banks source 31% of their funds offshore. The problem is that this percentage is still too high and it is rising because strong growth in the New Zealand economy is throwing up strong growth in demand for credit by people wanting to grow and set up new businesses in the likes of tourism, farming, and, of course, property development.

Developers are now struggling to get funds and that is a factor which will underpin house prices over the long term – lack of supply growth. But here is the key point to note. Many people have bought sub-dividable sections in expectation that under the Unitary Plan developers would snap their valuable asset up. But because developers are struggling to get funds, there is now, perversely, an over-supply of sub-dividable land. That means a price correction and that correction is likely to be greatest in areas where investors have been most active.

So don’t be surprised if over the coming year we see some newspaper headlines along the lines of prices falling 10% to 20%. This will be relevant to some areas of Auckland, but not the majority of the city where housing markets are driven largely by end-owners.