Housing price crash risk says Finance Minister English

What Finance Minister Bill English hoped to achieve by forecasting an Auckland housing price crash in the next eight years I can’t fathom. Who was he trying to impress?

In a prepared speech to members of Victoria University’s Business and Investment Club in Wellington last week, the man in charge of the country’s economy said an excess of housing supply “could produce a price crash” in the city. I expect to see an easing of prices, but a crash?

He says it takes about eight years for the housing market to respond to a shock in demand — as we have seen during the past 12 months or so when property in the city went up by 20 per cent. But now work is under way to address that demand, the result could be a monumental drop in property values according to English.

He says: “The point is that when the supply of housing is relatively fixed, shocks to demand — like migration flows increasing sharply as they have recently — are absorbed through higher prices rather than the supply of more houses.

“Long lead times in the planning process tend to drive prices higher in the upswing of the housing cycle. And those lead times increase the risk that eight years later, when additional supply arrives, the demand shock that spurred the additional supply has reversed.”

I don’t know when Bill English’s eight-year countdown clock started, but if he’s able to let us all know it could save us a lot of pain [if he is right in what he says].  Will we see a gradual reduction of house prices that undo that 20 per cent gain, and will Auckland mortgage payers find themselves in negative equity?

He got a few things right when he said housing costs are a larger proportion of incomes (meaning less disposable income), only 5 per cent of new homes are priced in the lowest quartile, and the new supply of lower-priced  housing has dried up.

Regions do well
Property owners in the regions have benefited from Auckland’s hot real estate market.

According to the Real Estate Institute’s third quarter figures, homeowners in the Waikato saw sale volumes almost double when 1185 properties changed hands — a 96 per cent increase  compared with the same time last year.

Also seeing a boom in turnover is Coromandel (91 per cent), Northland (74 per cent) and Bay of Plenty (64 per cent). Collectively the three areas saw 2480 properties sell in the three months to August.

Colleen Milne, the institute’s chief executive says Coromandel is becoming a suburb of Auckland thanks to the two-hour ferry ride to the city. “It is a great option for those looking for a quieter lifestyle but with the ability to reach Auckland if need be,” she says.

Milne says historically low interest rates are encouraging people to buy a holiday home in the north. If true, this is a reversal of what happened following the GFC when people started cashing up to reduce their financial liabilities.

Demand for property in the regions has also led to price increases. Median sale prices in Waikato/Coromandel are $353,000 and Northland property values are up by 10 per cent to $323,750, according to figures from the institute for August.

Although the number of sales in the regions are small  compared with the Super City, which saw 8663 sales for the quarter, Milne says there is a growing trend of  opting to live outside the main centres for a change in lifestyle.

Written for the New Zealand Herald.