Auckland prices not down 18%

There were some reports in the media recently saying that average house prices in Auckland have fallen 18% from their peak. This is not correct. Prices have fallen so far only by about 5.5%. It comes down to what price measure you use.

Each month a number of sources publish a price measure based on an average or median (middle number) of the properties sold that month. The trouble with this measure is that it can get thrown around by changes in the mix and price range of properties sold from one month to the next. For instance, if in one month a lot of apartments are sold but the next there are few, the average price in the second month will be biased upward because standalone house prices are greater than most apartment prices.

I only look at the REINZ House Price Indexes when considering house price inflation. These indexes are calculated in conjunction with the Reserve Bank, and they remove the distortions just noted. They allow us to say that on average in February Auckland house prices were about 5.5% lower than in November last year.

But will prices end up falling by 18%? Almost certainly not in nominal terms, but in real terms probably yes over the two years from late-2021. What does that mean?

A real price change can also be called a price change adjusted for inflation. If your house price rises 10% while inflation overall for the economy is 3%, we say that your real house price rise has been 7%.

New Zealand’s inflation rate will soon hit close to 7.5%. Over that same period of time the House Price Index for Auckland has risen by about 16%. That means real house prices in Auckland have risen by about 8.5% in the past year.

Now consider a year from now. The chances are that after falling 5.5% in nominal terms since November, Auckland house prices will fall by at least that amount over the remainder of this year. Let’s say they fall another 6.5% in the coming 12 month period.

Allowing for inflation just under a year from now being close to 5%, we can say that in real terms over the coming year Auckland house prices will probably fall by about 12%. Adding in the real price decline already recorded of almost 8% and the total real price fall may end up near 20%.

It is worth noting that over the second half of the 1970s average NZ house prices in real terms fell by about 40%. We are not facing that sort of environment this time around. But you do need to be aware that at some stage the media will shift from focussing on overblown changes in some inaccurate nominal price measures to focussing on inflation adjusted/real house price changes.

This will add to the challenges when considering Auckland’s housing market. One other will be rising interest rates. But these are unlikely to reach levels painful enough to elicit a wave of selling by either investors or general owner-occupiers.

Another factor which is more Auckland-specific will be discussions about the property shortage ending – especially in the contact of Auckland’s population shrinking for two years in a row. The growing discussion of a brain drain I have been warning about for the past 12-18 months is going to affect Auckland more than any other housing market because in past cycles people would often state their belief that migration was the key driver of the market.

This is not correct, but perceptions matter. The growing perception of an over-supply as population shrinkage meets the biggest boom in house supply since the 1970s will reinforce potential for price declines. At a minimum the discussion will encourage buyers to be more picky. The work of real estate agents will need to focus a lot more on convincing vendors to meet the market than warning buyers about the dangers of delaying a purchase.

But before we get too despondent about Auckland it pays to remember this. Over time net migration inflows will once again turn positive – probably come 2024-25, and Auckland will be the main beneficiary. Auckland is our largest and most internationally connected NZ city and the likely destination for many young Kiwis shifting from their home towns to better experience what life has to offer in terms of entertainment, socialising, and career advancement.

Also, Auckland has not been the centre of house price inflation for the past five years. Instead, it is the regions which have boomed the most and they are due for a correction in their prices which Auckland is not to the same degree.