Why are houses so expensive in Auckland and Welly?

[dede]

Yes I know, supply and demand. But is it driven at the margin by expat cash buyers? I'd be worried buying right now given value/income ratios (we are still living with the fallout in the States). Has it always been that expensive? Is there a Vancouver effect (i.e. Chinese buying)? Is it a knock on from Oz? But interesting when also seeing such a strong NZ $ - double trouble for us. Doesn't like what we witnessed in UK and US with deflating bubble, but only a matter of time? I dunno but would love to hear your thoughts.

[April]

Prices are still dropping here but yes the major cities are more expensive generally because it's where all the expats and locals go for work - I really can't see much else to cause it, especially in AKL. We're sitting on our capital at the moment and are watching houses that are slashing prices by over $100k - many of the houses we are watching on real estate sites have been on the market for at least a year if not three!

[tk1]

If you are interested, here is a bunch of graphical data on NZ real estate sales:
yearly:
http://www.queenstownproperty.com/ne...te_houses.html
more recent:
http://www.queenstownproperty.com/ne...ate_sales.html

The market overall is not that strong, but it does not look ready to crash either. Typically you see a big dip in numbers of sales for a while before you see a large price dip (people holding on to their homes because they initially refuse to sell at lower prices.) This is particularly true of higher price ares, since wealthier owners are more equipped to hold out if they don't like lower offers. And although total sales are less than they were a few years ago, they don't seem to be on a downward trend. So it would probably have to take another round of global recession to really drive prices down.

One interesting thing to note is that in the US prices have dropped about 33% back to 2004 levels, while in NZ they are still at close to the historical peaks set in 2007. The UK had bottomed out to 2004 prices, but have subsequently rebounded back to 2007 levels.

Because of the strength of the NZ dollar, their housing prices in US or UK currency are much higher than they were a few years ago. So in that sense, the home prices hit expats much harder than Kiwi's if the expats are using their old currency.

[Super_BQ]

But is it driven at the margin by expat cash buyers?

Is there a Vancouver effect (i.e. Chinese buying)?

Primarily, yes. There is no doubt that in the 3 main cities of NZ, there is a huge influence by overseas buyers. Since wealthy asian immigrants can't simply migrate to Canada, they choose the next country that is more willing to accept migration based purely on $$.

The other problem is NZ is a small country and the choice of investments is far and few, which leaves it none other than into real estate. There is no stock market like in New York or in Toronto where people can look for their retirement. In NZ, security into retirement is done primarily through investing into real estate. Not only there are no capital gains tax on the sale of these assets (well IRD structures the tax code so that investors will always hold for minimum 10+ years to avoid paying any capital gain) - meaning that if you add up the local investment + overseas migrants, you get a major inflation in house prices.

Is it a knock on from Oz?

No. The standard of living in Australia is higher than NZ and overall, people have more disposable income for the equivalent profession.

Keep in mind that in the US market, housing prices move in great variation (from boom to bust). Whereas in NZ, housing prices are always unaffordable (leaving no opportunity to buy cheap - at least not cheap like US prices).

[tk1]

Did NZ have any of the ugly mortgages that plagued the US? Like the 5 year exploding ARMs that required no proof of income, no down payment and they lent you 5% more than the price of the house? Those are no longer available, but are still resulting in millions of new foreclosures. I'm glad I am a renter, because it makes it an easier prospect to emigrate.

[bob_the_engineer]

in the main you need a big deposit to buy a house, or you have an expensive home loan.
interest rates are high,,, the only people I hear saying the house prices a crashing are people who want to buy houses.

kiwis buy a house, it's expensive with intreats rates ect ect, if they can't sell if for the amount they need to they simply keep it and rent it out. I'd hate to be a landlord, but kiwis don't seem to mind...

I can think of at least 5 people who I know own more than one house. that attitude tends to keep house prices stable.

bob

[Super_BQ]

Did NZ have any of the ugly mortgages that plagued the US? Like the 5 year exploding ARMs that required no proof of income, no down payment and they lent you 5% more than the price of the house? Those are no longer available, but are still resulting in millions of new foreclosures. I'm glad I am a renter, because it makes it an easier prospect to emigrate.

Sub prime mortgages never came to NZ (or to Australia for that matter). Unlike the CRA (Community Reinvestment Act) in the US, I am not aware of NZ having such laws. The banks here tend to be old fashion in that if you don't got enough down payment and a decent level of income, then you're out of luck. (There's no pity to the poor or the low incomers). BTW, virtually all the banks in NZ are Australian owned (exception is Kiwi Bank) - so their policies would be somewhat similar over there.

I can think of at least 5 people who I know own more than one house. that attitude tends to keep house prices stable.

YUP it's ingrained into the NZ culture. If the homeowner doesn't like the price, they just simply take the house off the real estate market and rent it out. But the crux of the issue is that NZ is too small of a country to have a diversified area of investments. The NZX (stock exchange) is so boring that I fall asleep - I wonder why TV news displays stock prices on the NZX - they don't move in fast and the dollar figures are very small.

You have to question, is it healthy for a county to have constantly unaffordable housing? The idea that 2 income partners have to work just to maintain a mortgage and a living (let alone not even considering the cost to raise kids?). Compare that to the 50s and 60s where the husband was the breadwinner and the wife stayed home to cook and take care of the kids - yet being able to afford a brand new car, new house, etc.

BTW, high interest rates in NZ isn't a discouraging factor on housing prices as long as wealthy migrants can come and buy cash. Question who are the ones getting richer?

[JandM]

(There's no pity to the poor or the low incomers).

Pity? That's not what I'd call what happened to the folks in America who were given false hope and enabled to get in debt above their heads.

[Super_BQ]

Pity? That's not what I'd call what happened to the folks in America who were given false hope and enabled to get in debt above their heads.

Purely from the bank's point of view - in NZ, if you don't meet the criteria, then tough luck.

For those in the US that were given false hope, well that's partly the fault of the gov't for passing laws like the CRA. The banks there found a way to make $ out of the scheme and it's the Americans as a whole that are paying for it. Yes the low incomers that should never of been in a 1/2 million $ home where THEY were able to get loans at interests rates BELOW the sub-prime rate (which by definition sub-prime is for top clients) has created a problem for every single American tax payer. Not just the rich and poor but future generations will pay for this mistake as the US gov't has bailed out these banks. The integrity of the US banks had been compromised by gov't interference - in NZ, there's minimal interference between gov't and the banks. Whereas the integrity of banks likes of Canada and in NZ hasn't - it's like the strict criteria prevents these false hopes that can cause a major collapse of the banking system. Besides, who do you know of anyone in NZ that was able to get a sub-prime loan? I've never heard of it and i'm sure it doesn't exist. It would be embarrassing for a doctor or lawyer to pay interest rates on their loan at much higher rates than the person on minimum wage.

[dede]

Many thanks for all your responses. I've lived and owned property in the UK and US..and eventually, I believe prices are all about income. We bought in 2004 in the US and the house is probably about the same value. I bought the house to bring up kids, not as an investment so I feel lucky despite the decline in real terms. The situation here is a big mess and it's going to last for years. Lots of people played property in the UK as well and had more than one property. I don't think that's been a great investment either, at least for those who bought at or near the top. My concern in NZ is the knock-on effect on the Australian-owned banks if/when commodity prices fall. All that being said it's doubtful to me that there will be a crash per se, more a deflating bubble. There are cities up the West Coast of the US whose rental rates are grossly out of whack with house prices due to Asian investment. Makes it good to rent, crazy to buy.