My recent post about my fictitious buy-side clients Bob and Betty garnered a number of comments, ranging from skepticism that first-time home buyers could buy a $1M home (hard to believe, but true here in the Bay Area) to commentary on other high-priced areas.

The writer of the latter was Bruce Smeaton, author of the blog HomeLoanGripes, whose tagline “Memoirs of a Grumpy Ex-Banker” captures the spirit of this edgy, irreverent, no-holds-barred commentary on the financial and real estate markets of our friends down under in Australia and New Zealand.

Bruce and I exchanged some emails, and I asked him to explain his view on the incredible run-up in property values in New Zealand. His response was, I thought, worth posting on my blog; though most of my content relates to Bay Area real estate, much of Bruce’s down-under insight applies here as well.

Over to Bruce…

Essentially, there are six dynamics at play - all in synch with each other - that are serving to drive the New Zealand residential property markets ever higher. These are as follows:

1) Net migration, particularly to the major cities, is at a five year high and shows no signs of abating.

2) Internal migration from rural areas to the main centres has increased steadily over the past decade and ‘keeps on keeping on’.

3) Recent moves by the Reserve Bank of New Zealand to ‘quell’ the momentum in the property markets here (dis-inflationary tactics by the bureaucratic pen-pushers in Wellington) has had the opposite effect! The RBA’s decision to increase the official cash rate by ‘yet another’ 25 basis points to 7.75% has seen a further increase in demand for investment property as ‘fence-sitters’ finally decide to take action by purchasing an investment property and lock in the current rates before they get too high.

4) Ironically, because the median price for a house in New Zealand is $330,000, a person on the average wage of $680 (after tax) per week would only have $60 left in their pocket each week after paying the mortgage!

This has had the obvious effect of forcing ‘would-be’ first-home buyers in the younger age bracket to delay (sometimes indefinitely) their decision to purchase, and stay renting. This in turn has seen the demand for quality, affordable rental accommodation ‘go through the roof!’

Rents have increased as a result of this demand - and in part from the higher cost of debt-servicing from increases in mortgage rates.

The net result of all the above in item 4) is that property investors have exploded out of the shadows and are once again buying up investment property en masse, knowing that over the coming months and years (for all the reasons above) there will be a net shortage of good rental accommodation.

5) Local councils have put artificial constraints on the releasing of land for development, forcing land prices higher “just so they can charge higher land rates” (in my humble opinion!).

6) Councils have also been insanely slow at issuing titles, codes of compliance, completion certificates and other necessary documentation, forcing up developer holding costs which are then passed onto the end-purchaser.

Apart form all the above, New Zealand is quite simply, one of the most scenically beautiful countries on Earth. Dozens of famous celebrities continue to flock down here and buy up large, idyllic lifestyle blocks. Shania Twain for example - who comes from a scenically beautiful country in her own right - owns a sheep station high up in the Southern Alps of New Zealand’s South Island!

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Tags: Real estate
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