Sales activity across the Auckland region has slowed over recent months in response to the latest round of lending restrictions imposed upon investors, by the Reserve Bank of New Zealand.
Values, however, remain supported by strong market fundamentals, predominantly, a rapidly expanding population, a low interest rate environment and most significantly, a regional housing shortage which continues to grow.
Lending statistics issued by the Reserve Bank of New Zealand clearly illustrate the influence of the tightening of credit conditions upon investors. The share of all new mortgage lending to the investor category fell from approximately 38% in mid 2016 to just over 27% as at January this year. A similar slowdown in investor activity was seen in late 2015 following the implementation of the initial round of lending restrictions. On that occasion investors returned to the market within a few weeks. The downturn has lasted longer on this occasion and it remains to be seen as to when the share of sales to investors increases again.
The softening of the market is also reflected in an increase in the total inventory available to the market as shown in the table below. While the total inventory and weeks to sell figures remain at below their nine year averages both have increased over recent months. In April 2016 the inventory figure was just 5,711 and the weeks to sell figure was sitting at just 9.3.
The December quarter also witnessed the start of a slight upward trend in mortgage rates, making the cost of borrowing relatively higher. It seems certain that the bottom of the interest rate cycle has been reached. While there are no indications, as yet, that the Reserve Bank intends lifting New Zealand’s Official Cash Rate, banks have increased mortgage rates to reflect the higher costs associated with borrowing from overseas.
As stated above, while sales activity has slowed values continue to be strongly underpinned. Median values saw double digit increases over the last year as the main drivers of the market remain in play. Net migration inflow to Auckland is at its highest levels. Net permanent and long-term migration to Auckland in 2016 was 34,000 which accounts for almost half of the country’s net migration.
Auckland’s housing shortage continues to grow. While the development sector is responding, with annual building consents now over 10,000 they are still not at the levels required to bring supply and demand back into balance. The sector is also facing a number of barriers to increasing output. The industry is facing capacity constraints due to the shortage of skilled labour. In addition, obtaining development finance has become harder over recent months, as banks tighten lending criteria for developers. Further hampering a lift in development is the fact that all indicators show a lift in construction costs which makes fewer development projects feasible.
Trends within the North shore residential market have mirrored those of the wider region. Values lifted again in the closing quarter of 2016 having eased in the September quarter. The quarterly median house price was up 0.5% from the previous quarter, sitting at $1,050,000. When compared to the corresponding three months in 2015, the rate of price growth was 16% or $145,000. The wider Auckland region witnessed an annual price growth of 13.2% over the same period.
Sales statistics for the North Shore residential market show the number of transactions in the final quarter of 2016 to have been 1,086, down 14.3% compared with the 1,267 recorded during the same period a year earlier. That compares with a 15% fall for the Auckland region as a whole. However, given the supply and demand imbalance prevalent in the wider region, the North Shore residential market remains tight and it took an average of only 40 days to sell a residential property in the local market over the final quarter of 2016.
More than half of 2016 sales over $1M
The impact of rapid price appreciation over the last year is well illustrated by the shift in the number of sales recorded within various value brackets between 2016 and 2015. Properties sold above 1M$ accounted for 52% of all sales in the year 2016, up from 41% recorded in 2015. Historically, median prices in the North Shore residential market sit at around 20% higher than the wider Auckland region. Consequently, the change in the share of the higher priced properties, sales over $1.5M, has been even more noticeable with an increase from 13% to 19% of total sales.
With local and central government aiming to alleviate the supply shortage of homes in the Auckland region, one approach is greater intensification of development. The ramifications of this policy are gradually becoming apparent in the North Shore market, as illustrated, particularly, by the increasing market share of apartments. In 2016, apartments comprised 6.5% of sales, up from the 2015 annual average of 4.7%. While this change looks marginal, it equates to a 38% increase in only twelve months, and this trend is clearly going to accelerate as ongoing apartment development complete and a mature second-hand market is established for apartments that, until now, have been sold off the plan or during the construction phase.
Supply responding but still falling short
Changes in the annual building consents in the North Shore ward clearly show the trend towards higher intensity development. Stand alone houses, which strongly dominated the construction activity before 2014, now make up a modest portion of new residential building consents in the North Shore ward. This is not due to a fall in the number of building consents for stand alone houses, which have, in fact, remained relatively stable over recent years, but rather a result of the significant increase in the development of multi-dwelling property types. It is important to note, on the other hand, that while there has been an increase in total residential building activity in the local market over recent years the increase has been relatively limited. Total consents issued in 2015 were only 268 greater than the number recorded in 2012 which marked the bottom of the current development cycle. 451 Consents were issued across the North Shore ward in 2016. While the North Shore ward accommodates 10.4% of all private occupied dwellings in the Auckland region, according 2013 census data, the ward’s new residential building consents issued in 2016 made up only 4.5% of consents issued in the Auckland region.
SALES HOT SPOTS – North Shore Residential Sale Prices (2016 HY2)