Auckland property price madness

At the current time newspapers are full of stories concerning property, and radio stations are running lots of advertisements about investing in property, especially in Auckland.

There are stories of people buying old run down properties in suburbs like Grey Lynn or Westmere for $1.4 million, which are almost 100 per cent above the most recent CV. To the rest of the country it must seem like madness, but I have to say it's largely true.

Having given financial advice for over 25 years, property is the one investment that has worked for most investors, and especially in Auckland. It's the investment that has almost a religious overtone about it, and can never be talked about in a negative way.

My father has gone into aged care and I've recently sold the family home. The home was bought in 1968 for $14,000, and sold for $707,000. To see if this was a good investment I used the Inflation Calculator on the Reserve Bank webpage, and came up with the following numbers.

The first column of the table shows the year the house was purchased, and various dates from old rates notices. The second column shows the purchase price in 1968 and the updated valuations from North Shore City Council and more recently from Auckland City.

The third column shows the value of the property if you take into consideration inflation over the past 45 years. So a $14,000 purchase in 1968 would be $228,043 in today's dollars. In 2002 the house was valued at $290,000, or $373,271 in today's dollars.

My parent's house was a modest 3-bedroom, 1 garage home a short walk from the Northcote shops. It had a brick base and weatherboards so no issue with weather tightness (leaky) problems. Apart from some minor alterations in 1972 the house is largely unchanged, so how did it become so valuable?

The simple answer is I don't know. It's a normal flat section, close to the shops and bus route into the City. It used to have great views of the Harbour Bridge and downtown, but over 45 years the neighbour's trees have gradually reduced that sales advantage.

Last year's rates notice gave the property a CV of $560,000, which was a land value of $460,000 and improvements of $100,000. In April it sold in less than three weeks for $707,000. On the first weekend of open homes we had 24 groups through the property and on the first day we received a pre-auction offer $100,000 above the current CV.

For my Dad it's a great outcome, and the money will come in handy paying the $1,000 a week for his aged care, but is the market rationale? At $707,000 is the land now really worth $607,000 and the improvements $100,000? When it comes to property it seems the laws of gravity are somehow different in New Zealand.

Clearly the OECD (Organisation for Economic Co-Operation and Development) doesn't think so. Its latest report says that New Zealand has the fourth-most overvalued property prices in the developed world. Auckland is even more extreme with 17 suburbs where the average house price is now $1 million or more.

I'm use to looking at economic fundamentals. If Fletcher Building's profits rise at 8 per cent a year, how can the share price rise 12 per cent a year? Usually profits have to increase or there will be a price correction because the shares are over-valued. If people's incomes rise at 2.5 per cent a year, how can house prices keep rising at 5 per cent, 6 per cent, 10 per cent a year? At some stage prices will need to reflect the fundamentals.

Try increasing your work productivity by 3 per cent a year and keep asking your employer for salary increases of 5 per cent -7 per cent a year. Like the Tui's beer ads say "Yeah Right".

My concern is the next generation of New Zealander's looking to get a home and a foot on the property ladder. As fast as they run the goal posts keep moving away from them.

In many cases clients are giving children pre-inheritances to help with the house deposit. Even with a $250,000 deposit, it still leaves young couples in their 30's with $500,000 plus mortgages. The usual answer is it doesn't matter because interest rates are low and I'm going to get a capital gain. "Yeah Right".

Jeff Matthews, an authorised financial adviser with Spicers, and is a regular media commentator on wealth and savings. The article is his opinion and should not be used as a form of financial advice.

Inflation adjusted price comparisons:

April 1968 $14,000 $228,043

September 1993 $176,000 $270,597

September 2002 $290,000 $373,271

September 2008 $550,000 $594,429

July 2012 $560,000 $563,388

April 2013 $707,000