New Zealand’s property prices are only 5.7% below peak levels seen in late 2007, having dropped 1.6% during the year to end-May 2011, according to Quotable Value Ltd. The national housing median price index was NZ$350,000 (US$293,419) in May 2011, according to Real Estate Institute of New Zealand (REINZ).
Aside from the devastation of Christchurch, the country’s second biggest city, by earthquakes, the country’s economy rebounded in 2010, recording an annual real GDP growth rate of 2.2%, after a two-year slump due to the adverse impact of the global crisis.
Positives for the market include:
Over the period of the housing boom (2001 to 2007) house prices rose 94% (66% in real terms), including 13.5% in 2005, 11.9% in 2006, and 4.5% in 2007.
Demand and house prices started to fall in early 2008, as the global crisis spread to New Zealand. During 2008, house prices fell 4.8% (-7.9% in real terms). Then in 2009, house prices rebounded strongly by 9.6% (7.5% in real terms). However in 2010, house prices fell again by 2.2% (-6% in real terms). The economy had shrunk by 0.5% in 2008 and 0.4% in 2009, according to the OECD.
New Zealand’s economy is projected to expand by 2.7% in 2011, based on OECD forecasts. However, the IMF expects just 0.9% growth in 2011. To boost the economy and rebuild Christchurch property market, the government has recently introduced expansionary fiscal and monetary policies. It is hoped that NZ housing market will start to recover in the 2nd half of 2011 and into 2012.
Just five months after the September 2010 earthquake, Christchurch residents were hit by another earthquake.To help them relocate from the residential red zones prone to earthquakes, the government made an offer to purchase their properties.
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The history of the boom
From 1992 to 2001, house prices in New Zealand rose in parallel with GDP per capita. House prices grew by an average of 4.9% per year from 1992 to 2001 while GDP per capita increased by an average of 4.6% per year over the same period.
Then from 2002 to 2007 house prices began to rise faster (by an average of 12.6% per year) than income (which grew by an average of 4.8% annually).
From 2008 to 2010, house prices dropped by an average of 1% annually while GDP per capita continued to grow, albeit at a slower rate of an average of 1.8% per year.
During the boom (2001-2007), the South Island registered the highest house price increases, due to the strong commodity market and tourism.
- Christchurch, the largest city in the South Island, achieved price increases of about 104% (74% in real terms).
- Other regions in the South Island saw even higher price rises, at around 141% (106% in real terms).
The North Island also saw strong house price rises from 2001 to 2007.
- Wellington’s house prices rose 79.7% (53.5% in real terms).
- Auckland’s house price rose 77.6% (51.7% in real terms).
Other North Island provinces registered an average 102.6%% price increase (73% in real terms).
Property sales up
The total value of residential property sales in New Zealand was NZ$2.46 billion (US$2.06 billion) in May 2011, up 8.4% from May 2010. Auckland accounted for almost half of the total sales of about NZ$1.21 billion (US$1 billion) during this period.
There were about 5,766 property sales in the country in May 2011, up 10.8% from the same period last year. However, this was just 62% of the total number of properties sold in May 2007.
In May 2011:
- In Auckland, there were a total of 2,188 property sales, up 16% from the previous year
- In Wellington, property sales rose by 4.6% y-o-y to 573 units
- In Canterbury, the number of properties sold was 654 units, down 9.9% from the previous year
The national median days to sell a property was 45 days in May 2011, up from 43 days in May 2010 and only 30 days in May 2007, according to REINZ.
In May 2011:
- Auckland recorded the shortest selling period at just 36 days, down from 37 days in May 2010
- In Wellington, the median number of days to sell was 47, up from 45 days last year
- In Canterbury, the median days to sell was unchanged from last year at 41 days
- Central Otago Lakes has the longest number of days to sell at 89 days
Construction activity remains weak
From January to May 2011, the total number of new dwelling units authorized was 4,993, down 25% from the same period last year, according to the Statistics New Zealand (SNZ). The total value of dwelling units authorized fell by 23% to NZ$1.43 billion (US$1.2 billion) over the same period.
In 2010, there were about 15,602 dwelling units authorized, up 8.2% from 2009 but still down by 15.5% from the levels attained in 2008. From 2002 to 2004, the average number of dwelling authorized was 30,000 per year. Then from 2005 to 2007, the number of dwelling authorized fell to an average of 26,000 per year.
With low levels of construction activity, a housing shortfall of 14,772 units is projected during the period 2011 to 2016, based on a report published by the Department of Building and Housing.
The country needs to build more than 20,000 housing units every year to maintain sufficient housing for the growing population, claim local property analysts. However, the number of dwelling consents was below 20,000 in the past three years. "Residential consents cannot stay this low given ongoing population growth and earthquake rebuilding," said Mark Smith of ANZ Bank.
The key interest rate is likely to remain at 2.5%
The recent downturn began when the country’s central bank, the Reserve Bank of New Zealand (RBNZ) decided to raise the Official Cash Rate (OCR) by steps to 8.25% by July 2008, from 5% in December 2003, to curb inflationary pressures. Floating mortgage rates rose to above 10%, while the 2-year fixed mortgage rate was above 9% by the second half of 2007.
However, in July 2008, the RBNZ dramatically reversed gear. By April 2009 the key rate was down a record low 2.5%, where it remained until May 2010.
Then the RBNZ decided to raise it by 25 basis points. In July 2010, the OCR was raised again by another 25 basis points to 3%. However, in March 2011, the key rate was slashed to 2.5% to cushion the economy after the Christchurch quake last February 2011.
Following the movements of the key rate, the floating mortgage rate dropped to 5.9% in April 2011, from 10.71% in April 2008. The three-year fixed rate slightly fell to 7.05% in April 2011, from 7.81% a year earlier.
The OCR is expected to remain at 2.5% until late 2011 despite high inflation, as New Zealand’s strong currency threatens the country’s economic recovery.
About 53.9% of the total residential mortgages had floating interest rates in May 2011, up from 12.9% in May 2008. About 27.9% of all mortgages can be reset after a year, while 4.8% are fixed for 2-5 years.
The mortgage market has slowed
New Zealand’s mortgage market has expanded rapidly over the past decade. Outstanding housing loans soared 201% from 1998 to 2010, according to RBNZ figures, rising from just 55.6% of GDP in 1998, to 90.9% of GDP in 2009. However, the size of the mortgage market shrank slightly in 2010, to 88.2% of GDP .
Rents rising, rental yields moderately good
The smallest sizes of apartment in Auckland earn yields of 6% or above – 6.4% in the case of apartments of 55 square metre (sq. m.), according to the Global Property Guide research conducted last August 2010. In a developed economy like New Zealand’s, a yield above 6% isn’t bad.
Rental yields in Wellington are similar with smaller apartments yielding above 6%.
The average weekly rent for new private tenancies in the country was NZ$334 (US$280) in May 2011, a rise of 0.9% from the previous month and up 4.7% from the same period last year, according to New Zealand’s Department of Building and Housing.
In May 2011:
- In Central Auckland, the average weekly market rent rose by 6.9% y-o-y to NZ$442 (US$371)
- In North Auckland, the average weekly rent was up 4.9% from the previous year, NZ$446 (US$374)
- In South Auckland, the average weekly rent rose by 6.4% y-o-y to NZ$399 (US$334)
Strong NZ dollar, high deficit
The strength of the New Zealand dollar, coupled with mounting budget deficit, is hindering a solid economic recovery. From an exchange rate of NZD1=USD0.5151 in February 2009, the New Zealand dollar has appreciated dramatically, to NZD1=USD0.8142 in June 2011.
In March 2011, the current account deficit increased to 4.3% of GDP from 2.4% of GDP early last year. As imports pick up on the back of rebuilding Christchurch from the February earthquake, the current account deficit is expected to rise to 5.5% of GDP by Q1 2014.
The country’s budget deficit for the year to end-May 2011 totaled NZ$10.75 billion (US$9 billion), 10.6% below forecast, due to higher than expected revenues and lower core Crown expenses. Despite the lower-than-expected deficit, Standard & Poor's and Fitch Ratings kept their credit rating outlook for NZ on negative watch because of concerns about the country's high foreign debt.
Inflation is another concern. In the year to end-Q1 2011, New Zealand’s inflation rate rose to 4.5%, the highest since September 2008, reflecting higher prices for petrol, housing, cigarettes, tobacco, and food.
Migration flows weak, bad for house prices
International migrant flows have a significant impact on house price movements and construction activity in New Zealand. The housing boom during the early-2000s was strongly associated with immigration increases during that time.
The net inflow of permanent and long-term migration was highest in 2002, with more than 38,000 migrants, followed by 35,000 in 2003 and 15,000 in 2004. However, net migration was just 3,800 in 2008, which was attributed to a weak economy and low employment opportunities. In 2009, net migration increased again to 21,300 but plunged to just 10,500 in 2010.
In the year to May 2011, the net inflow of permanent and long-term migrants was just 4,625, down 74% from the same period last year.
New Zealand’s population is currently around 4.4 million, according to Statistics New Zealand, up from about 4 million recorded in the 2006 census. With a growth rate of 1% per year, population is projected to reach 5 million in 2020