Auckland unattractive to investors - ANZ

ANZ has just released its latest Property Focus report and it suggests that with the steam taken out of the Auckland market, price pressures there are likely to remain subdued.

A key headwind for Auckland is affordability as its eye watering prices are holding the market back from resurgence, the bank’s economists say.

“But this is not true everywhere. And now that the Auckland market has cooled, the rest of the country is playing ‘catch up’.

“While there are reasons to expect Auckland house prices to rise faster than elsewhere on average over time, a large and unsustainable divide was created by Auckland’s recent astronomical rise.”

That means property is currently a less attractive investment in Auckland than in the rest of New Zealand, thanks to the price gap that has emerged.

Investors were willing to accept low rental yields – in anticipation of future capital gains – during Auckland’s recent boom period but those prospects have now been tempered, the economists say.

“We believe investors will continue to be wary around the country, given possible changes to government policies, but particularly in Auckland.”

However, the situation is different around the rest of country where ANZ expects the price catch-up dynamic to support the rate of regional house price inflation for some time.

Overall, they expect house price inflation to slow towards 2% over the next few years and doubt that it will gather pace from here.

That’s because, alongside affordability issues and the potential impact of new government policies, they believe the recent tightening in credit availability is unlikely to reverse.

Further, they don’t expect interest rates to go lower than they are which means their role as a spur for housing market activity has played out.

“Ultimately, we think house price inflation has found a floor, and it’s probably just as well as any resurgence in house prices would increase the risk of a sharper correction,” the economists say.

“Debt levels are high and the Reserve Bank is on the watch for any housing market risks that may emerge and leave the financial system vulnerable.

“This is particularly relevant for Auckland, where house prices and debt-servicing costs remains lofty relative to household incomes.”

In light of this, they think the Reserve Bank will take a cautious approach to gradually removing LVR restrictions, with no policy changes expected in the near term.