Don't believe everything you read in the papersIf the media are to be believed, it is lack of supply that is driving prices up. But this masks the real issue, and rather cleverly because there is some truth in the “we’re building too few houses” theory.
What drives up the price of anything in any market is: more money chasing each unit of the target (good, service, whatever). Merely building fewer houses than an increasing population wants will not, in and of itself, drive up prices a single dollar. It is the number of dollars chasing houses that is the key.
Population growth vs. dollars to spendWere Auckland’s population to rise say 30,000 pa but none of the newcomers has more than the clothes they arrived in and a suitcase of personal effects (ie practically no money), rents might rise quickly but property prices would in fact remain relatively stable.
Alternatively, were the population growth to be zero, but more dollars came into the market chasing Auckland property, rents would stay put but house prices would rise.
Essentially it is more money, not more people that has pushed up market prices. So, now we have fact and cause. And we could note that the Reserve Bank’s 20% deposit idea did absolutely nothing to address where most of the wall of new money is coming from.
While more new cash flows from China to the Auckland property market (16 of Barfoots Top 25 sales people for the last financial year were Chinese), this extraordinary boom market will continue, all else being equal. If not all else remains equal, e.g. suppose we build 10,000 new houses a year and the population stays static, prices might ease back slowly, but even then only if the new money from outside were to rise at a slower rate than the houses built.
But it is hard to imagine the population staying where it is. And almost as hard to imagine the new cash from outside would stop, even if population growth fall away. It comes for a number of reasons, and our population growth or a high rental yield would be well down the list.
What could dramatically turn this market on its head would be a sudden halt in the new money arriving in from China. If that’s the driver, and it disappears, we would likely revert to more ordinary market performance, albeit perhaps after a scary one-off price correction.
If you are asking yourself whether you should assume Auckland prices will keep running well ahead of inflation, you need to assess the risk of the tsunami of Chinese money drying up. Mostly it is more a case of having to guess future political decisions (at this end, and the other). The influence of how many houses are built etc is a minor factor by comparison.
If you would like to further tease out this conversation, or any other investment issues with me, please call the office on 09 5209200 and we’ll make a time.
David Burt - firstname.lastname@example.org
David is licensed by the Financial Markets Authority (FMA) as an Authorised Financial Adviser (AFA) and his Disclosure Statement is available on request, free of charge.
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