New Zealand's house price boom is over
February 20, 2018
During the latest quarter, house prices fell by 0.76% (-1.24% inflation-adjusted).
What a change! Last year, house prices were rising at breakneck speed, surging 13.91% (+12.41% inflation-adjusted). In 2015 and house prices rose by 11.15% (+11.06% inflation-adjusted), according to the Real Estate Institute of New Zealand (REINZ).
Why the reversal? Mortgage interest rates are inching up. A ban on buying by non-resident foreigners is imminent. Days-on-market are rising. And, frankly, house prices have become very high - especially in Auckland.
(But are prices "too high" in Auckland? Maybe not - read on below).
Auckland has average prices of NZ$ 845,000 (US$ 604,513) - the country's most expensive - followed by Bay of Plenty, with an average price of NZ$ 547,500 (US$ 391,682), and Wellington, with an average price of NZ$ 531,000 (US$ 379,878).
Auckland saw no price movement from the previous year, while house prices declined in the West Coast (-15.6%) and Canterbury (-3.2%).
The highest price increase was recorded in Hawke's Bay, with prices surging by 18.3% during the year to Q3 2017. Double digit house price hikes were also observed in Gisborne (14.9%), Northland (14.4%), Wellington (10.6%), and Southland (10%).
Modest to minimal house price increases were seen in Manawatu/Wanganui (8.4%), Bay of Plenty (7.9%), Otago (6%), Nelson/Marlborough/Tasman (4.9%), Waikato (4.7%), and Taranaki (4%).
The cheapest housing can be found in West Coast, with an average price of NZ$ 208,500 (US$ 149,161), followed by Southland (NZ$ 220,000 or US$ 157,388), Gisborne (NZ$ 270,000 or US$ 193,158), and Manawatu/Wanganui (NZ$ 271,000 or US$ 193,873).
"House price inflation has moderated due to loan-to-value ratio restrictions, affordability constraints, reduced foreign demand, and a tightening in credit conditions. Low house price inflation is expected to continue, reinforced by new government policies on housing," according to Reserve Bank of New Zealand (RBNZ) Governor Grant Spencer.
New Zealand saw spectacular house price rises of about 114% (82.6% inflation-adjusted) from 2001 to 2007. Then after a pause, there were five further years of substantial price rises 2012-2016. Because of this, housing in New Zealand has become really expensive, for a country with such a small population relative to its landmass.
Good rental returns in Wellington and Auckland
Last year, we found that the best rental returns available on apartments in Wellington had moved slightly ahead of Auckland. This may reflect a jump in prices of larger properties in Auckland, which would tend to reduce the rental returns. “Foreign buyers are mostly drawn to the Auckland area”, explains Bill Sandston, a real estate lawyer.
In Wellington, the capital of New Zealand, rental yields on 1 and 2 bedroom houses are now around 5.5%. Apartments, and particularly smaller apartments, tend to earn more - last year we found returns of from 6.88% to 8.43%
In Auckland, last year we found that rental yields on apartments ranged from 6.09% to 7.18%.
Property transaction costs analysis in New Zealand are rather low, and in regional terms, the total costs of buying and then selling a property are very attractive.
Rental income tax is high in New Zealand
Rental Income: Rental income is taxed in New Zealand at progressive rates, from 10.5% to 33%.
Capital Gains: Capital gains are not normally taxed in New Zealand.
Inheritance: There is no estate duty payable in New Zealand.
Residents: Residents are taxed on their worldwide income at progressive rates, from 10.5% to 33%.
Buying costs are relatively low in New Zealand
Total transaction costs are relatively low at 4.23% to 4.80%, of which 3.5% to 4% (plus 15% GST) goes to the real estate agent as commission. The buyer pays the registration fees while the seller pays the agent's commission. Each party pays for their lawyers. There are no stamp duties. There are only two procedures needed to register a property and each procedure takes a day to complete.
Tenant protection laws are neutral in New Zealand
New Zealand law is neutral between landlord and tenant.
Tenancy Laws: The Residential Tenancies Act 1986 guarantees the rights of both parties and sets the parameters of their relationship.
Rent: Landlord and tenant can freely agree on the rent, and any increases are allowed provided that the landlord gives sufficient notice or there has been no rent increase over the last six months. A tenant can call upon a Tenancy Tribunal for rental assessment if he thinks the increase is excessive.
New Zealand's robust economic growth will continue in 2018New Zealand's economy is projected to expand by over 3% in 2018, according to the International Monetary Fund (IMF). For the last three years, the economy's performance has been the strongest since 2007, with growth of 3.5% in 2017, 3.6% in 2016, and 3.2% in 2015, according to the IMF.
After the Asian financial crisis New Zealand experienced years of unbroken economic growth. The economy grew by an average of 3.8% per year from 1999 to 2007.
During the recent global crisis the economy contracted only briefly and mildly - by 0.4% in 2008. The economy grew slightly by 0.4% in 2009. New Zealand emerged swiftly from recession, after only five quarters of negative GDP.
New Zealand's net external debt remains low at around 22.2% of GDP (2016-2017), a decline from 24.4% of GDP in the previous fiscal year.
Unemployment stood at 4.6% in Q3 2017, according to the Statistics New Zealand. Inflation was up by 1.9% during the year to Q3 2017, an increase from 0.4% in Q3 2016. The current inflation is within the RBNZ's target range of 1% to 3% for 2017.