Thursday, 30 May 2013

The Auckland housing market, revisited

I'm a great believer in 'economics by walking around', just as the management theorists are fond of 'management by walking around'. Particularly when I was the BNZ's chief economist, and got out to enormous numbers of meetings and groups, I quickly realised that I was learning far more about the economy, from the people who turned up at those speeches or meetings, than I was passing on to them in my prepared speech. They told me things that weren't showing up in any of the published statistics or surveys. And everybody won: the feedback I got  improved my take on what was going on, and my next prepared speech would be more on the button for the next audience.

All of which is by way of introducing one new bit of anecdotal economics by walking around: what's happening to the Auckland housing market.

I run, most days, plantar fasciitis permitting, and as I puff my way round the North Shore neighbourhoods, it's become very obvious that many existing family homes are being bowled over and being replaced by new infill development. One day, there's an old-fashioned family home on the quarter acre section, next day it's gone, the day after that, the builders are in putting up two or three townhouses. The latest one is right beside us. Yesterday, and literally around the corner from us (we're on Clematis Avenue, the house was on Sunrise Road), the big machinery came and took away the existing house, and any minute the construction crew will arrive.

There's good news and - maybe not for today or tomorrow, but in due course - potentially bad news here.

The good news is that the market's working. Housing demand in Auckland exceeds supply, prices are high and rising, and supply is responding:  two (maybe three) households will get accommodated where one was before, albeit with the loss of the garden.

The potentially bad news is that this sort of supply response is the sort of response you get in the later stages of a house price cycle. I remember, when we first moved to Auckland in early 1995, this sort of thing was all the rage, too. We had friends, and this was all they did: bowl, or improve, existing houses. And I remember going to look at one renovated house: there were four twenty-somethings involved (I gave up on who was with whom, or why) whose modus operandi was to buy a wreck, live in it while they expanded it, flick it, and move on to the next dump.

So that's the market today. At this stage, and I know this is seat of the pants stuff, I wouldn't (and maybe this is where I might be parting company with the Reserve Bank a bit) say that the price rises are in any sense hugely out of whack. For now, in Auckland, there's genuinely strong demand and genuinely limited supply, so what would you expect?

There's a whole side debate to be had about the role of arguably too-loose monetary policy exacerbating the demand side, but even if mortgage rates were appreciably higher, I reckon there'd still be something of a supply/demand imbalance that would justify a strong market. And if he hasn't already, Reserve Bank Governor Wheeler could usefully get on the phone to ex-Governor Don Brash, who faced the same problem of trying to differentiate a region-specific house price boom from a potentially more alarming generalised blowout in asset prices.

So we know where we are: we're well into a bull market. I'll be keeping an eye on it as I run past, but for now, that's all that's underway: I wouldn't say we're at or near the top of the cycle. There's certainly a lot of this speculative in-fill redevelopment going on, but it seems to me, for now, that there is a good opportunity cost basis for it. In this tight market, the tired or small 1950s home on the big section badly needs to be put to its most productive use.

There's the odd straw in the wind that's suggestive of things getting a bit over-enthusiastic: as I mentioned in a previous post, the real estate agents are frenetic, and yet again, this morning, we had a letter imploring us to put our house on the market. At a guess, though, I'd still say that this is a strong market, rather than a fevered one.

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