House Prices are Rising Quickly
Sales Prices in NZ are up 4.1% since the bubble ended, Wellington 7.3%
Table of Contents
Prices for homes are on the rise since the bubble ended, and so are rental prices. Household Incomes are clearly growing very quickly, possibly >7% annualised.
The national sales price rises is more complicated than a simple 4.1%, each region has supply/demand differences that have impacted prices during the bubble;
Auckland rental prices are not rising quickly due to oversupply this year
Hamilton has a shortage of homes so prices are up, but rental prices are lower than expected if rental supply is not meeting demand. Inventory suggests supply is low so maybe is there another activity - eg a dominant property manager not advertising properties?
BoP has been consistently short of supply for both rentals and sales. Yet price rises are about normal, most likely because existing prices are very high in a supply restricted market.
Wellington has a surplus of properties for sale as well as rent, so prices have been held down on rents, even declining some months. So why have house prices risen so high? Because Wellington house prices reacted to the end of the bubble by becoming over depressed (see the charts below).
Christchurch rentals appear to be in balance but actual prices are low, so this sharp increase may be a correction.
Otago seems to be roughly the same as NZ.
Updated Prices tables
I updated the rent stats in the Rental Prices tab above to include January rents, (unfortunately MBIE delay rental prices by a month). Both house prices and rental prices are up over 7% YoY for NZ as a whole. I extrapolate sales prices from the bottom in June, July or August for each region)
QV February Data
QV publish excellent data in their House Price Index but then try to gain publicity by commenting well outside the data and failing to explain the real value of the data. Here are some quotes:
Property values are slightly higher on average annually for the first time since August 2022
average home value increasing by just 1.3% nationally to $925,812 – down from 2% quarterly growth in our previous index
However, the slow but steady growth that we have been experiencing since June last year now appears to be flattening even further.
This trend is expected to continue over the next few months.
all the value softening we have experienced over the last 12 months has now been reversed at a national level
None of these statements are supported by their data if it is interpreted as information. QV distrust their monthly data so use 3 month rolling averages and all the comments above are about the last 3 months. The issue is that it misleads, if prices rose sharply just before the 3 months - as they did. A fixed period is of little value if changes occur just outside the period. They need to look at all time value trends before commenting.
Some facts from the raw data:
The New Zealand average house price bottomed at $888,999 in July 2023 and after 7 months by February 2024, average house price was $925,812 a 4.1% rise. Thats a hefty rise, crudely annualised it would be 12/7*4.1% or just over 7%.
However it looks different in each region, one of the extremes is Wellington where the rise is 7.3% in 7 months (12.5%). Lower Hutt bottomed a month later and the rise is 5.7% in 6 months (11.4%)
All this says is that average house prices rise at different rates in different regions. So do household incomes change regionally at different rates. As above in my introduction, each region has unique and different supply-demand forces that influence prices, I explore those below
Media Comments
New Zealand media do not have the resources to interpret the QV data so they universally rely on what QV says. QV press release was focussed on the February quarterly rise from January with this; “Annual growth back in black despite flat February” Their comment “The national average home value is now 0.6% higher than the same time last year and 13% below the market’s peak in late 2021.” would have you thinking that the market is flat. Yet clearly their slightly longer data says the market is rising quickly.
the Media picked up on what they could;
Interest.co.nz “New Zealand's average dwelling value increased by just $351 in February, Auckland's average value declined by $5391”
NZHerald (January) “Average value increases, but growth rate slower than last quarter”
RNZ “House market remains flat, diminished demand to continue - QV”
I cannot find any other media reports so I suspect media have long given up on reporting the data because data is bland and hard to understand. Data needs to be converted to information.
Information
Take a look at actual house prices indexed to the end of the bubble, ie how quickly are prices rising at the present time? It turns out they are rising quite quickly, not “flat”To get the chart below I index each region to the month where the average price was at a minimum, mostly July 2023, but sometimes a month before or after. I include Household Income, also indexed to July 2023. Household incomes in this chart is for all of NZ so should be compared to the black prices line for NZ and its a very good match
In this chart, hover over February 2024 and you will get the numbers from the top chart. Apart from the bubble from October 2019 to July 2023, NZ prices in the black line have followed Household Income very closely. All regions have grown since their bubble ended.
However some regions have grown at very different rates since their bubble ended and followed different paths during the bubble. This may be clearer if I reproduce this chart based on a pre-bubble date, so I used July 2019 because it seemed the most common steady state - but it is not.
The chart below shows how much sales prices vary by region-specific issues affecting supply and demand. The best example is Wellington which was over depressed through the bubble and is now recovering faster. Each region has a different bubble appearance, because construction, migration and supply/demand is different in each region. The recovery is partly influenced by how much the bubble increased prices, which in turn is dependent on supply/demand.
The Main Story - Prices are matching Incomes
It turns out to be very easy to see the real impact of prices in the regions. Simply index the data to household incomes as I have for 10 years now for rentals. In house prices, this is often called the affordability index, which shows how many years it takes for a household to earn the price of a house. Note household income is not a wage earners income, but potentially many earners in a household.
The main story is that as I have proven frequently over the last 10 years in rentals - prices match household income with minor differences if supply-demand gets unbalanced. I show that in the tab “Sales Prices” above which shows house prices by region as Multiples of Household Income, repeated below. The average was 7.7 in June 2018 and is also 7.7 in February 2024. That chart is below for reference, but is explained in the tab. Data turned to information makes current rises appear to be as expected given current supply/demand situations in each region.
Unfortunately Household incomes are only reported annually by Stats so since June 2023 - I apply Household income as though it were growing at the same rate is was for the 12 months June 2022-2023. Household income since June 2023 is unknown but I don’t do forecasts so I have extrapolated. Unfortunately this data issue is most critical since the end of the bubble. However, errors introduced are likely to be small and less than measuring errors.
Wellington, Christchurch and Hamilton are all trending to the same level, about 7 times, Auckland is higher at 9.5 but falling, while Tauranga with considerable growth issues has trended up to 9.7.
Multiples by Chris Bishop and others
Chris Bishop wants the multiple to be 3-5 times “The new housing minister has set a target of having homes costing just three to five times household incomes - well below what they are now in most of New Zealand.” Unfortunately, a house today is a very different product from a house in his “internationally popular metric” Bishop; “We have an affordability problem in New Zealand and have done so for 30 years because we have designed a planning system that has made it very difficult to build more housing, and it is a social and economic problem we've simply got to grapple with.” The planning system may or may not be partly to blame, but actually its measurable that permanent price rises occurred in 2 periods when major changes were added to building codes - insulation requirements in 2003 and then in 2013 it was scaffolding, resulting in house price increases as new builds competed with existing homes. Adding excellent but impossible to reverse improvements to the code raises the prices of all homes because many improvements are imbedded in existing homes. Regular updates to materials have also increased costs, eg increasing insulation thickness (happening again right now) and increased wood treatment for 4x2 timber. See my January post for more info but this is the chart:
Clearly the 2021 house prices in Wellington were an abberation and the 2022 decline seems like an overreaction in hindsight yet the subsequent recovery in price is not proof that the bubble is over.
Whether we are talking NZ residential property or U.S. equities it seems like ever lower interest rates and debt rising with asset prices along with moral hazard from government bailouts of mistakes and fraud have conditioned market participants to buy the dip.
It may be that the bubble is over and the recovery is in place but there is also the risk that we haven't yet seen the real forced deleverging, panic selling and capitulation in asset prices that tends to mark the tail end of a bubble. I don't think the likes of Williams Corporation have a sustainable business model or that the banks and RBNZ have been transparent about the real risks on their books.
In an environment of persistent inflation our interest rates need to be high enough for the treasury to sell government bonds, I don't think residential property speculators are front of mind in this scenario.