Auckland house prices picked to rise

Fairfax Media

BOTTOM OF THE MARKET: The chief housing analyst of Australia's largest independent economic consultancy has picked the Auckland housing market to start rebounding mid-year due to a residential construction slow-down straining an already under supplied market.

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The chief housing analyst at Australia's largest independent economic consultancy has called the bottom to Auckland's plummeting house prices - but only if banks start lending again.

Robert Mellor, managing director of BIS Shrapnel, says prices in the Auckland housing market will bottom out by May this year, and should return to growth by 2010.

However, price growth would be slow and steady until 2012 - topping out at around 3.5 percent, which is just above the approximate rate of inflation.

"Underlying demand and rental growth should provide a floor to house prices.  If there are any further declines, it may be by one percent averaged over the course of the whole year," said Mellor.

"There will not be a quick return to strong house price growth.  In four to five years, we expect median house prices to grow about 1.5 to 2 percent above the inflation rate in Auckland, Wellington and Canterbury."

BIS Shrapnel research indicates median house prices have fallen around 16 percent since their peak in early 2008.

Mellor said his forecast was based on two assumptions - that banks would begin lending to residential construction projects again within 12 months and that a rise in unemployment will be gradual rather than sudden.

He said he expected banks to begin lending again within 12 months, but there was potential for "quite a significant disaster type scenario" if it took longer.

"Auckland has been in a state of housing undersupply for a number of years now and the number of new housing consents has dropped well below what is needed to keep up with increasing demand," said Mellor.

Auckland's population grows by around 22,000 people per year, while only around 4000 new housing consents have been granted for the past three years.  BIS estimates around 10,000 new dwellings must be constructed to keep up.

If the demand pressure is not relieved, rental prices are set to skyrocket, BIS maintains.

Economists have pointed out the 2006 census showed there were over 33,000 unoccupied dwellings in Auckland at the time, thus there could not be a housing undersupply problem.

But Mellor said the unoccupied houses did not represent an untapped source of potential rental housing.

He maintained unoccupied dwellings were vacant for a reason - either they were holiday homes, were being renovated, being prepared for sale or were in a state where they were not fit to be lived in.

"There is no support for the view a whole lot of stock will suddenly appear on the market."

The only other real risk to BIS's projections was if there was a sudden, sharp increase in unemployment - for example, if unemployment rose from the current 4.2 percent to 6 percent over the next six months.

If that occurred, house sales and prices would likely stay depressed for significantly longer as the ability for people to buy would be severely undercut. 

Meanwhile, Mellor expected house prices in Wellington to recover and start growing by 2012. He said Canterbury has been in a continuous state of housing over-supply for a long time and this was expected to continue to be the case.  This means prices in the region will only return to growth in four years.

Meanwhile, ANZ economist Philip Borkin said house sales and prices were already falling before the labour market was even touched by the recession. The labour market was now the key driver for housing.

"We expect sales will recover well before prices do because vendors will become more realistic about their prices and that will get a bit more volume flowing," said Borkin. 

"In nominal terms, we think house prices still have to fall another 10 percent on top of what we've already seen." 

That would bring Auckland's house prices down 26 percent from last year's peak. However, Mellor said he did not believe the prices would fall that far because the housing supply shortage and rental prices would provide a price floor.

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