Q + A
Episode 914
JONNO INGERSON
Interviewed by CORIN DANN

GREG BNZ, ANZ and Westpac have followed the Australian banks and this week stopped lending to foreigners wanting to buy property here.

The question is – will it make any difference? So far, there's been little evidence to prove that foreign buyers are the major driver behind the latest surge in house prices. Political editor Corin Dann sat down with Jonno Ingerson, the director of research at CoreLogic and asked him are investors squeezing out first home buyers?

JONNO So when the first round of limits came in in late 2013, the first attempt by the Reserve Bank to slow things down, we did see first home buyers dip out the market a little bit by a couple of per cent and the investors were the ones who stepped in. And since that time we’ve seen a steady increase in investor activity in Auckland. And as Auckland’s got more and more expensive, it’s increasingly been those investors that have been the ones that have become more and more active, so they’re not just active at the bottom end of the market; they’re active right across the range. But what is an investor? And I think we need to make some distinction about these different types of investors, because your sort of standard property investors are the ones that’ll buy a townhouse or a flat type property and get it rented out, and they’re providing a housing choice for people that might not otherwise be able to get into the market. That’s one block. There’s another block of what you’d call speculators, and they are people that are buying, perhaps doing up and selling quite quickly for a profit, so that’s another form of investment. And then you’ve got people that you could call them accidental investors or Mum and Dad investors who are, ‘Well, my kids need a house. They can’t afford it, so I’ll buy one. It could be in Dunedin, for example, or in Auckland and help my kids get into the market.’ So now they’ve become an investor, but it’s for quite different reasons. So all those groups of investors have different reasons for why they’re active in the market. Some of it is because, ‘I can make good gain on my money.’ Some of it’s because, ‘Well, it’s become so unaffordable. I’m the only one that can afford to get in.’

CORIN But you show in your research that rents aren’t exactly going through the roof and the yield, the amount of money you could make on a rental property, isn’t huge, so it’s clearly capital gain, isn’t it, that’s driving this?

JONNO Yeah.

CORIN And even those people are happy, presumably, to pay tax because they’re making so much money?

JONNO And that’s part of, I think, why I’d call this market a bit scary is that for many of these investors it’s not actually about the standard, ‘I’m going to get some rental yield on this property because the rent I can get will cover the cost and so on.’ It’s more saying, ‘I can see future capital gain – considerable future capital gain – so it doesn’t matter what my rent level is.’ And if you look at the rate of increase of rents in Auckland over the last few years, it is nowhere near keeping pace with values. Theoretically it should. As values go up, rent goes up. But in Auckland, as with the rest of the country, where incomes haven’t risen, you as a landlord can’t put your rent up by the same that you’ve seen your property go up – 20% a year, 25% a year. You’re constrained by the income. So you’ve got a situation in Auckland where the landlords will push it as hard as they can – 5% a year.

CORIN If wages are only increasing 1.5%, 2% a year, yet you’ve got house prices going 15, 25 in Hamilton or whatever, surely the rubber band’s got to break at some point.

JONNO Yeah, that’s it.

CORIN Because people just won’t be able to afford to buy a house – a million-dollar house – on those incomes.

JONNO That’s exactly right, and that rubber band has got to that point that this is so tight now, when do we think this rubber band can break? It’s an affordability issue now. If you look at the ratio between house prices and incomes in Auckland, that’s one of the things the IMF points at why New Zealand’s one of the most unaffordable housing markets in the world. And you’ve got a situation where there’s a big block of people in Auckland that couldn’t hope to get into this market. Part of the issue we’ve got here is it has become so expensive. It’s now at an equal to Sydney in terms of how much house prices got to.

CORIN And so some of those Aucklanders clearly— your data show are clearly moving out of Auckland and are starting to bolster the regions. What is happening here? Is that investors doing that?

JONNO Yeah, it’s a bit of both. Talk about Auckland money flowing out of Auckland – part of it’s investor and part of it’s people choosing to move. And if you look at the investor side of things, when the rules came in late last year, trying to constraint Auckland investment, they didn’t apply as much outside of Auckland, so the logical choice for an Auckland investor was, ‘Well, why don’t I look down the road to Hamilton? It’s pretty cheap down there. The yield is pretty good.’ And so we saw a big flood of Auckland investors into that Hamilton market where at a point late last year, they were making up around 17%, 18% – of all the sales in Hamilton were to investors from Auckland. Prices then went up by 25%. Same in Tauranga. Same in all the areas surrounding Auckland. You’ve seen this investor money going, ‘Well, let’s look out because they’re trying to stop us investing in Auckland, but the rules don’t apply outside of Auckland,’ and the effect grows. But then you’ve also got Aucklanders that are saying, ‘Gosh, this is a really expensive market. It’s unaffordable. What are doing living here? We could sell up and move to Tauranga,’ and that’s what we’ve seen a number of people doing. They’ll sell up in maybe West Auckland, South Auckland fairly affordable properties, buying top-end in Tauranga.

CORIN Where does this end? I mean, there will be people who will argue that the underlying factors are just going to keep this going.

JONNO Yeah.

CORIN Immigration is still strong. Some people think, in fact, that it will keep going longer than it has been predicted, and there is a supply shortage. So what’s the problem? It’s going to keep going, isn’t it?

JONNO That’s the way I see it. If you go back to your basic supply and demand, to fix this problem in Auckland we would need tens of thousands of houses built tomorrow. At the moment, with our net migration – and a lot of that net migration, remember, is New Zealanders coming home from Australia now that their economy has weakened and the mining boom’s backed off – so we’ve got New Zealanders coming home, New Zealanders not leaving contributing to a high number of people coming into the country and not building houses fast enough, and it would take two or three years at the current rate just to catch up with where we are now. So what we need to happen is that migration to back right off, and that probably means New Zealanders starting to go back to Australia again, and we’ve ramped up our building of new houses. We’d probably done some other bits and pieces to try and slow down the investor activity. All of those things, that’s years. So what I think people like the Reserve Bank are looking at is, ‘That’s kind of okay that we’re in an environment where that’s inevitable, but let’s try and constrain how much prices grow by during that period, but we probably can’t do a lot about it.’

CORIN At the moment, say, in Auckland you have to have a 30% deposit if you’re a property investor. Presumably they are looking at increasing that. We learnt that this week. They could double that. They could, say, extend it around the country. Would that work? Would that help?

JONNO It would help to some extent. I think what we’re looking at here is not going to be one silver bullet that’s going to solve it, and that’s part of the challenge that the Government, the Reserve Bank, the Treasury, anyone looking at this problem, if you want to call it a problem – how do you solve it? It’s really complicated. And you think even, going back to who’s active in this market at the moment, it’s property investors, and you can point the finger and say, ‘Damn property investors.’ Well, you know what? That’s middle New Zealand, because New Zealanders, like Australians, love buying property and investing in property instead of in stock market or whatever else it is. ‘Let’s buy a property for investment.’ So you start hammering that group of people, you’re doing two things. One is that you’re potentially eroding their wealth, and, two, they tend to vote, and so any decision you make as a government is probably going to be pretty unpopular.

CORIN This is the danger, though, isn’t it? You do run the risk now where they hear about their neighbour making $100,000 in six months on some property they bought in South Auckland and so they suddenly think, ‘Oh, I’m an idiot. I’m missing out,’ and so they’re rushing to get in as well. Does it start to feed on itself?

JONNO That again is a part of why I think this is a little bit scary because you can talk about Auckland being in a bubble, and I’ve never really been a subscriber to the whole bubble theory. We have an undersupply of property, rather than an oversupply of somewhere like an island. But bubbles are also characterised by the behaviour of the people in the system. And if you look at Auckland, the most common length of time for an Aucklander to hold their property for is less than one year, followed by two to three years, followed by one to two years, and then eight years, which is kind of normal in a market. Eight years is a distant fourth. So you’ve got this activity happening in Auckland of people buying and selling property really quickly. Why? Well, it’s not just investors. There’s all sorts of people that go, ‘Because the market is increasing, I can make some money off it. I can move around in it.’ It becomes self-perpetuating. That’s the bit that as an economist looking at this you’d say, ‘That’s the bit I’m worried about, that speculation.’

CORIN Well, that’s interesting too, because that suggests, say, that the bright line test that the Government brought in, which was to say, ‘You sell within two years, that’s a clear line there. You have to pay your tax on your capital gain,’ that’s not deterring people.

JONNO No, and if you look at the people that that was targeted at, which would be the speculators, if you like, that are driving the market, turning it over quickly, a lot of them were doing that as a business anyway.

CORIN And paying tax, presumably.

JONNO And paying tax. Quite happy for the IRD, sure, yeah, ‘I bought and sold, and I’m paying you my big block of tax.’ The people it was aimed at were those that were skirting around the system. Yeah, it’s knocked a tiny number of those out, but—

CORIN Yeah, but that suggests they’re making such a decent profit that they’re quite happy to hand over it.

JONNO Quite happy. Make 100,000, there’s your 50,000, 30,000, whatever it is and keep going.

CORIN Is the only solution to try and constrain the growth over the next couple of years, as you say, to try and limit the damage, effectively?

JONNO Yeah, and I think it does have to focus in on those investors in some way. You’ve got to try and bring the balance back more towards people who are moving house or people who are first home buyers.

CORIN And is the banking system the best way to do that? Like the ability for them to access credit?

JONNO That will be part of it, but bearing in mind that probably 20% to 25% of Auckland investors don’t have a mortgage, they’re buying purely in cash, then any rules you have around lending aren’t going to touch those people. But the vast majority are going to the bank and saying, ‘I want to buy an investment property. Can you lend me some money?’ Yeah, so you can constrain those people to an extent.

CORIN For those first home buyers, what do they do?

JONNO If it was me, I’d be starting to get a little bit nervous about what the future holds for the Auckland market. Can it keep going like this? I don’t think so. Do I think it will calamitously collapse? No, but probably more likely we’re going to see a period in the future of there might be a short dip and a period of flat growth. It’s a risky time, I think, to be looking at getting into the Auckland market. There’s so much attention on it, so much intention to try and slow it down. Be careful.

CORIN So we have talked quite a bit about Auckland. We are seeing prices starting to rise in other centres as well, perhaps not Christchurch, where things have flattened off. Wellington, some of those other North Island cities, Queenstown. What hope is there for buyers there? There is almost a bit of a stampede going on in some of those cities now too, isn’t there?

JONNO Wellington, for example, where people have sat back and the market’s very quiet and you’ve got first home buyers now in particular that are looking around going, ‘Gosh, there’s a whole lot more demand now. We’ve got to get into the market.’ And so the last six months particularly in Wellington you’ve seen the market pick up quite a bit at a time when the supply’s dropped right away. There’s hardly any listings, so that’s made prices go up pretty strongly in places like Wellington, and it’s the same across most of the rest of the country now. I think a lot of first home buyers are realising that they’ve had years where they could sit back and go, ‘Oh, it’s not quite for me. I’ll let it go.’ They can’t do that any more.

Transcript provided by Able. www.able.co.nz

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