Property price softening bad news

SUPPLY: Although rising house prices have been a problem – the lower cost of borrowing has meant that some first home buyers could still enter the market.Photo Nick Krause

Recent indications of price softening in the Auckland housing market are unlikely to bring much relief to first home buyers and will almost certainly make the housing supply problem in Auckland even worse, according to Property Institute of New Zealand chief executive Ashley Church.

He was responding to comments by ANZ chief economist Cameron Bagrie who said recently that ‘the game is over’ for the Auckland housing boom due to rising interest rates and higher borrowing costs.

Mr Bagrie said that the cost of borrowing would ‘trump’ the supply shortage and that the market has now moved into a ‘fundamentally different’ phase. Mr Church agreed with Mr Bagrie’s assessment but says that this latest development isn’t good news for the market.

“The Reserve Bank loan-tovalue restrictions have been slowing the market for some time – and it’s entirely possible that rising interest rates will consolidate that slow-down and reduce price pressure by scaring some people out of the market – particularly those who were chasing capital growth, such as property investors,” Mr Church said. “But that’s not necessarily good news. Auckland still needs over 40,000 new houses and we’ve long been of the view that the way to get those built quickly was to divert property investors away from existing dwellings and into investing in new homes. Unfortunately, it now looks even less likely that that will happen”.

Mr Church says while there is some debate over the extent to which investors have been a factor in the Auckland property market – with figures ranging from 25 per cent to 45 per cent – their impact on the market has been significant. “Depending on which figure you believe – property investors have represented between a quarter and almost half of the market. With the right incentives, those are people who could have been diverted into investment in new dwellings – but instead, most of them will now disappear from the market.”

Mr Church said there has been too much focus, particularly by the Reserve Bank, on strangling speculation rather than increasing supply and he said that the chickens are now coming home to roost.

“Congratulations – you’ve almost killed off market activity. Now there’s just that small matter of the 40,000 housing deficit that still needs to be resolved”.

Mr Church also says that a softening in prices is unlikely to make much difference to first home buyers. “Although rising house prices have been a problem – the lower cost of borrowing has meant that some first home buyers could still enter the market.

“That small advantage will now be largely offset by rising interest rates which will also start to quickly erode the amounts that banks are prepared to lend to those borrowers.”

Ultimately, the situation is unsustainable, he said.