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Healthy times for house building

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  • Healthy times for house building

    Healthy times for house building
    5:00AM Sunday August 05, 2007
    By Gill South

    New figures issued last week show a surprisingly hardy construction sector with building consents in June up 15.8 per cent from the month before, which in times of a supposedly slowing property market may seem out of kilter.

    But demand for new housing remains as strong as it ever has been, say industry commentators, and with higher value now being placed on new, well-insulated housing, developments are not being held back by rising interest rates.

    Instead, community-style complexes - such as McConnell Property's Addison and Anselmi Ridge in South Auckland - are attracting empty nesters and young families going into their second homes.

    Both like the more affordable prices of South Auckland compared with the areas they are coming from, such as Botany Downs and Dannemora. The empty-nesters like the security and low maintenance aspects of the housing developments.

    As both are doing well out of selling their family homes, rising interest rate rises are not much of a problem to them, says McConnell Property's marketing manager, Tony Walsh.

    His buyers are collecting "nice capital gains" from selling terrace houses in Dannemora and are now able to afford prices at the Addison development in Takanini, where homes are selling from $450,000 to $580,000.

    Although the Addison project is coming to the end of stage two, there has been no hesitation within the company about moving on to the stage three.

    "We have just about sold out of stock at Addison stage two," says Walsh. "We've got about 14 properties left at Addison and are waiting for the next stage.

    "We are comfortable with the product and price because we just see ongoing demand."

    There seems to be no danger of a glut of new housing in Auckland, with regional population projections pointing to an increase of 435,000 from 1.217 million in 2001 to 1.652 million in 2021.

    ASB chief economist, Nick Tuffley, says: "In the past, property construction has been volatile. Housing construction, if the market stops, falls quite quickly while the housing market adjusts through sales turnover."

    The market does look to have softened, although there is still a high level of borrowing growth - following early signs that the market is at turning point, says Tuffley.

    The market peaked in 2004 but had a couple of "mini-peaks" late 2006 and early 2007, but he expects by the end of this year there will be a noticeable sense of cooling.

    He adds that he is not seeing precautionary behaviour yet which happens when the economy is slowing, and taking on less commitment, such as larger mortgages or a new car.

    "We don't have that at the moment," says Tuffley. "There is less construction going on than in the peak of mid-2004."

    He believes the sector has been just a bit constrained and has had "growth pains".

    Trying to alleviate Waitakere's growth pains, Mayor Bob Harvey has revealed plans to change the city's district plan in New Lynn, Westgate and Hobsonville, which will give the area 8700 new homes by 2000. New land will be open for development in the Westgate and Hobsonville areas.

    "This is our best opportunity yet for Waitakere's economy to thrive and find solutions to deal with the city's rapid growth," he says.

    Other parts of Auckland benefiting from population growth of between 12.4 per cent between 2001 and 2006, have been Manukau City areas, such as East Tamaki and Point View - which grew by 10,803 people (393 per cent) - and North Shore City, Albany and Fairview, which grew by 1,848 people (128 per cent).

    According to one Auckland property company director, developers have been constrained not by demand but rather by longer periods of waiting for planning consent and higher building fees.

    Wise developers - with a view to any future property crash - could still do well to sell the development on once planning was in place.

    Indications are a slowdown is not far away.

    Property consultancy, DTZ's head of research Ian Mitchell says: "A period of slow growth or no growth may well be approaching. If we do have a correction in the labour market, then there will be an increase in the numbers of mortgagee sales."

    First and second home buyers, people who have stretched themselves with not much capacity to move, would be worse hit by an economic slump, he says.

    Meanwhile who is suffering in the current climate?

    Those who are being hit by the Reserve Bank's decision to raise interest rates are those who have just bought, property investors and first home buyers, say bank economists.

    Those who have most recently bought will be feeling uncomfortable.

    "They will have had the most debt on board and not be holding much equity in the property," says Brendan O'Donovan, chief economist at Westpac, who expects property investors to put their activity on hold given low returns on rental income and high interest rates.

    "Investors make their decision on numbers, not on sentiment," says O'Donovan. "By our estimates, the value of a $350,000 property to an investor has been cut by $90,000 because of interest rate jumps."

    When investors start to step back from the market, then new construction tends to take a step down, says O'Donovan, but he does see certain good quality housing developments continuing.

    "In any property correction, good quality properties tend to hold up well, just as with commercial construction tends to be the prime property in A and B class which hold up well - the dross of the market, the Cs and Ds, take most of the hit."

    Many first home buyers are arguing that property is unaffordable, but the economists don't seem to think property is truly unaffordable in NZ.

    John Tanner, CEO of mortgage broking company Loan Market, says he is not putting first home buyers off getting on the first rung of the property ladder - even in a market where interest rates are on the rise.

    He says: "People are taking out mortgages over 20, 25 or 30 years. We are in 2007. Who can tell me what the rates will be in 2010?"

    He adds buying property has always stretched people and this hasn't changed over the past few decades - and that people never regret buying in hindsight.

    Meanwhile, there are some areas of Auckland that are likely to be vulnerable to price drops, says Stephen Hart, author of Where to Live in Auckland.

    Areas with highly mortgaged young families in "so-so neighbourhoods" are probably among the most at risk, and suburbs in this category include Onehunga, Ellerslie, Albany, Glenfield, and Pakuranga.

    "The south Auckland suburbs are probably the safest (metaphorically speaking) right now, because their low capital cost makes them affordable to first home buyers and investors pushed out of other areas."

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