Runaway market not unique

New Zealand has experienced an unprecedented housing market boom during the past two years, but most countries have similar issues. Miriam Bell reports.

High demand for housing coupled with limited supply, rapidly escalating prices, and affordability issues are causing concern around the world.

The latest Knight Frank global house price index shows New Zealand prices have increased the fastest over the past five years.

At the same time, 48 per cent of the countries monitored had annual price increases of more than 10 per cent. That is up from 13 per cent before the pandemic.

The top 10 ranked countries, which included New Zealand, Australia, the United States and Canada, all had annual price increases of over 15 per cent.

But many cities had even bigger increases. The top 25 in Knight Frank’s city index all had increases of more than 20 per cent. Wellington and Auckland were among them, but so were three cities in Canada, four in Australia including Sydney, and five in the US.

Knight Frank researcher Kate Everett-Allen says prices have been pushed higher by government stimulus, savings accrued during lockdowns, a pandemic-induced reassessment of lifestyles and low interest rates, leaving many countries with housing affordability and supply challenges.

Dr Eric Crampton, The New Zealand Initiative’s chief economist, says New Zealand is far from unique in its problems. House prices everywhere will continue to go up until new supply meets demand, he says.

‘‘When the ability to build more houses comes in and supply increases, demand will ease, rents will go down and prices will normalise. But supply chains are a mess globally and in many places it has become harder to get houses up. That’s holding up development.

‘‘And, in some places like San Francisco, the issues are even harder to address because of restrictive planning regulations.’’

Similarities to Australia

Australia, as our trans-Tasman neighbour and the country that attracts the most Kiwi migrants, has the market New Zealand is most frequently compared with.

Although Australia might be much bigger, the two markets are remarkably similar in composition and trend, CoreLogic Asia-Pacific head of research Tim Lawless says.

The Sydney and Melbourne markets tend to drive the broader market and dominate headlines, as Auckland and Wellington do. Other city or regional markets follow, often experiencing ‘‘halo’’ effects from the bigger markets.

As New Zealand has had astronomical price increases, so too has Australia. CoreLogic’s latest home value index showed the national median value in Australia increased 22.1 per cent in the 12 months to the end of December. That left it at A$709,803 (NZ$758,484).

Over the same period in New Zealand, CoreLogic has the national average value up 27.6 per cent to $1,006,632, and the Real Estate Institute’s latest figures put the national median price up 21.5 per cent to $905,000.

Prices rose by double-digit figures annually in every main city, with Sydney, Melbourne and Brisbane recording 25.3 per cent, 15.1 per cent and 27.4 per cent increases respectively. This left their medians at A$1,098,412, A$795,108, and A$683,552.

Lawless says affordability and credit pressures similar to New Zealand’s are across Australia, but the pace of gains is softening and, after a period of rare synchronisation, conditions are becoming more diverse in different cities.

‘‘Momentum has slowed quite sharply in Melbourne and Sydney, with a surge in new listings and affordability constraints taking some heat out of the markets.’’

But in cities such as Brisbane and Adelaide and some regional markets such as Queensland and

Tasmania, momentum remains and there is no evidence value growth is slowing, he says.

‘‘These regions have less of an affordability challenge and better support for housing demand, with Queensland in particular showing strong interstate migration. Also, there has not been the same supply response as other regions, with advertised supply remaining well below average.’’

Australia’s prices are often cited as more affordable than New Zealand’s, but Lawless says once converted there is not much difference between Auckland and Sydney’s prices, or between Wellington and Melbourne or Brisbane’s.

And while there are federal and state government incentives for first home buyers, there are also stamp duties and capital gains taxes. Stamp duties, which vary between states, have a big impact on affordability, he says.

‘‘They increase the deposit and transaction costs involved, and make it more challenging to get a foot in the door.

‘‘That’s the problem for first home buyers, rather than servicing a mortgage. But they haven’t slowed price rises.’’

Rental markets are also tight in most areas, with vacancy rates at record lows and rents up about 10 per cent, Lawless adds.

UK defies expectations

Historic ties to Britain mean it is another housing market often compared with New Zealand’s. While it has not rocketed to the degree some other markets have, it has also experienced a boom.

Prices rose 9.8 per cent last year, which equates to more than £24,500 (NZ$48,300) and is the largest annual cash rise since March 2003, according to the Halifax house price index. That left the national average at a record high of £276,091.

Halifax managing director Russell Galley says the market defied expectations, despite Britain being in lockdown for much of the first six months of the year. Lockdown savings and a six-month stamp duty holiday were contributing factors.

‘‘A lack of available homes for sale, and historically low mortgage rates, have also helped drive annual house price inflation to its highest level since July 2007,’’ Galley says.

He expects price increases will continue but at a slower pace relative to the past two years.

There is regional variation. According to Halifax, Wales had the biggest annual price increase and, in England, the Northwest region had the highest increases while London had the lowest. But London’s average price was £525,351.

Lessons from Europe

Housing affordability researcher Hugh Pavletich says a factor to consider when comparing markets is that many cities have a much higher proportion of medium- to high-density homes, and apartment living is widely accepted. Traditionally, New Zealanders like bigger homes and lots of space, he says.

That means our housing stock has more standalone homes that are more expensive to build and fit fewer people.

‘‘Only now is that beginning to change, with the new planning rules and the drive to boost supply via densification.

‘‘But we are also a different, less compliant society and place greater value on private property rights than many of the European countries with populations closer to ours.’’

Sweden (10 million people) and Austria (9 million) are often cited as markets for New Zealand to look to for inspiration. Sweden is mentioned for a successful government-sponsored construction scheme with which it tackled an acute housing shortage from 1965 to 1974, while Austria has had policies that actively support construction of homes for purchase and for renting in place for decades.

In Austria, supply has kept up with need and rental housing is plentiful and affordable. But the home ownership rate is 55.4 per cent. New Zealand’s was 64.5 per cent at the time of 2018’s census.

Pavletich says renting is a more viable and attractive option in places like Austria.

‘‘I’m of the view that we can learn much from the Europeans about secure occupation systems for rental housing. Our current ‘unsecure’ system is simply not acceptable.’’

Despite strong public housing and rental systems, European countries have not been immune to the global price boom. In the Knight Frank index, Sweden was ranked fourth with an annual price rise of 20.3 per cent; Austria was 27th with 10.4 per cent.