How will this crazy property cycle end? What will Auckland’s housing market look like in a decade?
Will it be an elite international city where home ownership is the preserve of the rich and privileged?
Will the market overheat and crash, causing financial pain and hardship for many but offering opportunity for a new generation of home buyers?
Or will we resolve the issue, as this Government seems to think we will, with a steady and stable increase of supply to flatten prices?
It’s hard to predict the future. But we can imagine plausible scenarios.
We can also decide what sort of behaviour may be likely to cause those scenarios. We can adjust our behaviour to achieve the scenario we think most desirable.
That’s probably be a bit much to expect. We are talking about property and this is New Zealand. We’ve been arguing about it since at least 1840.
But let’s take a look at what we know about that numbers underpinning Auckland’s surging property prices.
Westpac senior economist Satish Ranchhod has published an excellent report – A Tale of Three Cities – crunching the numbers on the property market in Auckland, Christchurch and Wellington.
His snap shot of the past five years in Auckland paints a troubling picture.
Between 2011 and 2016 Auckland’s population rose by 154,800 or 11 per cent. Meanwhile, the increase in housing stock over the same period was just 6 per cent.
Throw in a period of low interest rates and, what looks like a relatively small shortfall, has had an incredible effect on the market.
Average house prices in Auckland rose 95 per cent between February 2011 and February 2017.
Rents rose 31 per cent over the same period. And median wage growth was 23 per cent.
The Government remains adamant that inequality hasn’t worsened under its watch.
I’m no mathematician but based on those numbers it looks as if people who owned a house in 2011 have become a lot richer. And people who have rented are now poorer.
Luckily I’m in the former camp. Unluckily I have children.
It gets worse.
We’ve had another 50,000 people arrive in Auckland in the past year and projected growth is for 290,200 more between 2018 and 2029.
Don’t get me wrong, I’m not blaming the new arrivals. I was one once. I’ve also lived in and loved cities a lot bigger than Auckland.
Growth and diversity are part of what makes cities a great place to live.
But we need to acknowledge that Auckland is going through an historically unprecedented time of growth.
We need to plan for it. Actually, we needed to plan for it. Instead we argued about it. Government blamed council, council blamed government. We pretended the differences were complex and difficult to resolve.
In reality no one in power was particularly motivated to resolve the issue because so many home-owning Aucklanders were feeling so much richer.
In the past year the Government has grudgingly accepted there is a problem and council has finally introduced its Unitary Plan, clearing a path to faster development.
Here we are then, ready to start dealing with a problem that is already well out of control.
As Ranchhod notes, in a dispassionate way: “Housing market tightness will get worse before it gets better”.
In fact he estimates building levels – which though rising are still not yet at the minimum required to keep up with population growth – will need to stay elevated for another decade to address Auckland’s housing shortfall.
So where will we be in a decade?
Well, we may have a crash, that’d fix it … but it wouldn’t be pretty.
Some think Auckland’s property market can’t crash. It’s true that values for renovated villas in good school districts have never fallen through the floor. But CBD apartments and developments on the city fringe do – almost every decade.
Imagine that we are successful in ramping up supply. But progress is slow so prices keep rising.
We may see tough policies introduced to curb immigration and taxes to deter investors.
If that were to happen just as supply was peaking, we would have all the right conditions for a sudden downturn.
An international banking shock, a spike in interest rates: Bob’s your uncle, all of a sudden there’s a whole bunch of first-home buyers wondering why they paid $900,000 for a two bedroom unit in Helensville … or apartment investors staring into a hole in the ground.
Then again, perhaps we won’t get there on supply in the next decade.
A consensus about the need to build doesn’t mean it is going to happen.
Who will fund all this building? Who will hammer in the nails or plumb the toilets? We have acute skills shortages in the trades, which may put a limit on the pace of building.
If we’re still struggling to keep up in a decade – if house prices have continued to outstrip wage growth as they have in the past five years – this will be a very different city.
It will be a more sterile, less diverse place with gentrification stretching from the Eastern bays to the Waitakere ranges. We’ll have an underclass of transient service workers, more homelessness and more crime and poverty.
And don’t get me started on the traffic.