A discussion on house prices vs incomes in New Zealand

[donthatetheplayer]

I read a lot about houses in New Zealand being overvalued. These claims are arrived at by comparing current house prices to average income levels and historical averages. The world is becoming far more gloabalised than ever. Many people can choose to live where they want and New Zealand is a highly desirable place to live. New Zealand has fairly loose immigration policies. House prices in Auckland are cheap (dollar for dollar) by comparison to many international cities.

Is it possibly the case that houses in New Zealand are not overvalued. Perhaps it is the case that incomes are simply too low. Rather than attacking high house prices all the time should we be looking at why our income levels are so low compared to the rest of the (1st) world?

This interests me because I agree house price to income ratios are out of kilter. Nevertheless, I do not think that there is going to be a big drop in house prices any time in the foreseeable future. Quite the opposite - I think house prices will keep rising, in Auckland and Christchurch at least. The only two possible outcomes then are for house price to income ratios to remain out of kilter and even get worse or for incomes to increase significantly.

All comments welcomed.

[elguapo]

Perhaps it is the case that incomes are simply too low.

If incomes are too low and they rise to the 'correct' level, what would the impact be on house prices?

[Leftette]

In what way are NZ's immigration policies fairly loose?

At current price vs income ratio the Govt is pressured to act - increase supply, reduce overhead, whatever. Any worse and actions will become more definitive than they are today. For that reason I do not see the disparity continuing to grow substantially.

[donthatetheplayer]

Good question eluapo. Firstly though, as you state, what should the "correct" price level be? Let's consider milk solids. We produce it just down the road. I can head down to my mate's farm and see it being produced. Yet the price of milk solids is set and fixed at an international level. It's a global commodity. Is property becoming a global commodity also. Are prices around the world equalising as society becomes more globalised? Will the "correct" price of houses be set based on comparable properties in comparable cities around the world rather than predominantly local factors. Is this adjustment what is happening at present?

So perhaps if local incomes rise property prices will not be affected as much as we might expect.

[donthatetheplayer]

Leftette - If you are a skilled migrant or have a bit of money NZ is a fairly easy place to get into. Besides that almost anyone can buy freehold land here. In one of the other countries I have links with neither of these things are true: It is difficult to get a work visa for most jobs. You need to have quite specialised skills in a very limited number of fields and only citizens can buy freehold land.

[elguapo]

So perhaps if local incomes rise property prices will not be affected as much as we might expect.

The logical conclusion from this is that property prices are largely driven by buyers who's incomes are not local.

[Rosco]

Property is obviously supply and demand based like all other products.

The perception of the media and public is that house prices are going up. Therefore lots of potential sellers are holding on, and hoping for more in say a years time. So less sellers means less supply, and prices should go up. Obviously houses are being built and I read yesterday that Auckland has 5,700 consents in the last 12 months.

Incomes, interest rates, immigration and other factors affect demand. I think the high immigration figures have a major impact on demand. Basically 30,000 + people need houses. Add on some natural growth and I'd guess a lot more houses are needed than are being built.

Solution - build a super fast rail system to Hamilton to help share Aucklands burden

Ross

[PC]

No no no - capital gains tax, rental WOF and some more enquiries - that'll fix it!

[donthatetheplayer]

The logical conclusion from this is that property prices are largely driven by buyers who's incomes are not local.

Potentially but not necessarily so. Take myself for example. I am a local but when considering what I am prepared to pay to buy property in Auckland I am not just thinking about New Zealand. I am thinking about what my money can buy in other countries too. Auckland seems comparatively cheap so I have a lot of confidence to buy here. If I thought it was "too expensive" I would take my money elsewhere and by where I thought prices were more "affordable". I expect this is the same for a lot of people.

Another question would be: Are property prices set based on people's current years income / previous years / future? Repayment ability is based on current and future but saving a deposit is based on previous years. If property prices are set based on previous years income then average income for locals is less of a consideration. We need to look at what all those people who have come or returned from overseas were earning before they arrived here.

[elguapo]

Auckland seems comparatively cheap so I have a lot of confidence to buy here.

If you think Auckland is comparatively cheap, why are you not buying in Wellington or Hamilton? They are comparatively cheaper again.

Page 5 of this document has an interesting graph for this discussion....
http://www.chranz.net.nz/pdfs/rbnz-t...use-prices.pdf

[elguapo]

Solution - build a super fast rail system to Hamilton to help share Aucklands burden

Ross

It would be cheaper to move Auckland to Hamilton.....

[donthatetheplayer]

If you think Auckland is comparatively cheap, why are you not buying in Wellington or Hamilton? They are comparatively cheaper again.

Auckland is an international city. Wellington and Hamilton are not. There is a lot going on in Auckland. I think most migrants settle in Auckland for the same reason.

[elguapo]

I think your kidding yourself with this idea that Auckland is an 'international' city. What does that mean exactly?

It's just the biggest one in NZ, that's why most immigrants settle there.

[Wayne]

I am thinking about what my money can buy in other countries too. Auckland seems comparatively cheap so I have a lot of confidence to buy here. If I thought it was "too expensive" I would take my money elsewhere and by where I thought prices were more "affordable". I expect this is the same for a lot of people.

So if it is a PPOR then you can't buy one elsewhere - it has to be in the city you want to live it.
If it is for an investment on what basis are Ak houses comparatively cheap?
I would think that this would have to be based on return.
So you would have to judge if the return is comparatively more - on a risk basis (currency risk being one risk).

To compare the market forces of the milk price to house prices doesn't wash for me - milk is a lot more transportable than houses.

[Wayne]

I think your kidding yourself with this idea that Auckland is an 'international' city. What does that mean exactly?

I have found over the years that a city is generally only as big as the space people use - often that is only their suburb and neighbouring suburbs.
There are people in South Auckland who haven't seen the Sky Tower (I know this because we took a bunch of kids from a Leo club there to the tower for the 1st time).
Just as there are people in big cities who have never seen large parts of the city they live in.