Saturday 16 December 2017

Improving Wellington sees property investment wave

The housing market in Wellington has imprived sharply, attracting foreign investors
The housing market in Wellington has imprived sharply, attracting foreign investors

Matthew Brockett

Wellington real estate agent Gareth Robins says he's taken more calls from Auckland investors in the past six months than he has in the past six years.

With the housing boom in Auckland, New Zealand's largest city, showing signs of coming to an end, investors there are looking further afield, and they have more buying power than owners in other centres. Since 2007, the average value in Auckland has jumped 70pc to NZ$926,000 (€580,000); in capital city Wellington, it's gained just 10pc to NZ$584,000.

"They can come down here and buy three investment properties, and that's what a lot of people are doing," said Robins, who estimates 20pc of his sales this year have been to cashed-up Aucklanders. "They're a lot more blasé about price, almost like it's not an issue."

Auckland's spreading property bonanza is one of the reasons Reserve Bank Governor Graeme Wheeler may tread carefully as he considers cutting interest rates to a fresh record low on Thursday. Even as the case for more monetary stimulus mounts, the bank is wary of fuelling demand for housing with lower borrowing costs.

"Sure, Auckland seems to be stabilizing -- but stabilizing at grossly overvalued levels," said Stephen Toplis, head of research at Bank of New Zealand in Wellington, who expects Wheeler to keep rates on hold this year. "The remainder of New Zealand is now picking up a head of steam that is probably considered unwelcome."

While Auckland house prices fell 0.7pc in the three months through February, and the annual pace of increase slowed to 18pc from 24pc in November, prices in other cities are surging, Quotable Value New Zealand data show. House- price inflation accelerated to 22pc in Hamilton and Tauranga, while in the long-dormant Wellington market, prices gained 4.7pc in the past three months and 7pc in the year.

Only two of 17 economists in a Bloomberg survey predict Wheeler will loosen policy on March 10, with the remainder expecting him to hold the official cash rate at 2.5pc.

Financial markets have reduced bets on a cut, pricing a less than 30pc chance at 5:30 p.m. in Wellington, swaps data compiled by Bloomberg show.

Wheeler is nevertheless expected to reduce the cash rate to 2.25pc in June, according to a majority of economists.

Several see it at 2pc by the end of the year.

Slumping oil and dairy prices and a firm New Zealand dollar have conspired to keep inflation below the bottom of the RBNZ's 1-3pc target band for more than a year, and below the 2pc midpoint since late 2011. Inflation slowed to 0.1pc in the fourth quarter, the lowest since 1999.

The challenge for Wheeler, who witnessed the U.S. subprime crisis unfold as a senior World Bank official in Washington, is to boost inflation without causing a housing bubble that could put the whole economy at risk.

In a speech last month, he signalled he's in no rush to cut rates, saying a mechanistic approach to weak inflation would risk "creating serious distortions in the financial system, housing market and broader economy."

Since then, dairy giant Fonterra Cooperative Group Ltd. has cut its forecast payout to New Zealand farmers in another blow to the economic outlook, and a measure of inflation expectations watched closely by the central bank has plunged to a 22-year low.

"They'll be very concerned about the risk of inflation expectations becoming embedded in price and wage setting behaviour," said Zoe Wallis, senior economist at Kiwibank in Wellington, who predicts Wheeler will cut rates this week. "If you are convinced that you probably need lower interest rates this year, I don't really see any advantage in waiting."

Wallis argues Wheeler has other tools at his disposal to cool the housing market if needed.

The RBNZ in 2013 put a limit on the amount of low-deposit home lending banks could undertake, and on Nov. 1 last year it specifically targeted Auckland investors, who it estimates are responsible for more than 40pc of sales in the city. It now requires them to hold a deposit of at least 30pc of a property's value to get a mortgage.

Still, "the RBNZ is very mindful that low interest rates have contributed to Auckland's overheated housing market," said Nick Tuffley, chief economist at ASB Bank in Auckland, who forecasts two rate reductions starting in June. Wheeler "may prefer to be confident the Auckland housing market has cooled before cutting further," he wrote in a note to clients.

Robins says low borrowing costs and a lack of supply are key drivers in the biggest surge in Wellington property prices in almost eight years. Then there's the Auckland investor, who's seen prices in their own city rise at a double-digit percentage pace for much of the past four years.

"Wellington's always been a very conservative investment market, where mum and dad rely on an investment property to be their retirement fund," he said. "Now we're seeing a new type of investor, the prospector. They can see a potential jump in the Wellington market, and they're coming down here in droves." (Bloomberg)

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