The New Zealand puzzle: low population, high property prices (and high rents)
Last Updated: January 02, 2016
The nationwide median house price rose by a meagre 0.82% to NZ$459,500 (US$308,692) during the year to end-November 2015, a sharp decline from the y-o-y rise of 7.24% in a year earlier, according to the Real Estate Institute of New Zealand (REINZ). During the latest month, house prices declined 0.1% month-on-month.
However the number of property sales in New Zealand was up 8.5% to 8,048 units in November 2015 compared to the same month last year, and up by 2.7% from the previous month, according to the REINZ. Excluding Auckland, property sales increased by 23.8% in November 2015 from a year earlier, and rose by 4.6% compared to October 2015.
Of New Zealand’s 12 regions, Auckland recorded the biggest house price rise with a 14% y-o-y rise. Auckland has the country’s most expensive housing with an average price of NZ$ 675,000 (US$453,465), followed by Central Otago Lakes, with an average price of NZ$482,000 (US$327,883) and Wellington, with an average price of NZ$435,000 (US$295,911).
Auckland's high price rises were followed by Otago (9.7%), Waikato/Bay of Plenty (9%), and Northland (6.1%). House prices rose in eight out of New Zealand's twelve regions.
In contrast, Central Otago Lakes saw the biggest y-o-y decline in house prices of 9.9% in November 2015, followed by Manawatu/Wanganui (-6.9%), Taranaki (-3.2%), and Southland (-1%).
New Zealand saw spectacular house price rises of about 114% (82.6% inflation-adjusted) from 2001 to 2007. After a pause, there were three years of substantial price rises 2012-2014. Because of this, housing in New Zealand has become really expensive, for a country with such a small population relative to its landmass.
New Zealand's economy grew by 3.20% in 2014, up from 3% in 2013, 2.7% in 2012, and 1.4% in 2011, according to HSBC. However, the Treasury expects the economy to slow this year, with a projected real GDP growth rate of 2.1%.
Of 1,797,900 private dwellings in New Zealand, 63.7% are owner-occupied, 32.6% rented, and the remaining 3.7% provided free (September 2015).
In Auckland, the number of days to sell rose to an average of 33 days in November 2015 from 31 days in the previous year. Properties are selling fastest in Otago Region, with a 25 days-to-sale average in November 2015 (down from 29 days in November 2014). In Wellington, the median number of days-to-sale was 28 days, an improvement from 32 days last year. Canterbury/Westland and Nelson/Marlborough followed, with the median days-to-sale at 29 days in November 2015.
Northland Region has the longest number of days to sell, at 44 days in November 2015, an improvement from 46 days the previous year.
Good rental returns in Wellington and Auckland
We find that rental returns on apartments in Wellington have now moved ahead of Auckland. This may reflect a jump in prices of larger properties. “Foreign buyers are mostly drawn to the Auckland area”, explains Bill Sandston, a real estate lawyer.
In Wellington, the capital of New Zealand, rental yields range from 6.88% to 8.43%, with smaller apartments earning more.
In Auckland, rental yields on apartments range from 6.09% to 7.18%. Unfortunately, we were only able to sample smaller apartments, but these usually earn much better returns.
In Christchurch, our sample properties consisted of houses, not apartments. Houses tend to have lower rental yields, so the fact that we found low yields in Christchurch probably reflects the kind of property we looked at, rather than any objective difference.
Rental income tax is high in New Zealand
Rental Income: Rental income is taxed in New Zealand at progressive rates, from 10.5% to 33%.
Capital Gains: Capital gains are not normally taxed in New Zealand.
Inheritance: There is no estate duty payable in New Zealand.
Residents: Residents are taxed on their worldwide income at progressive rates, from 10.5% to 33%.
Buying costs are relatively low in New Zealand
Total transaction costs are relatively low at 4.23% to 4.80%, of which 3.5% to 4% (plus 15% GST) goes to the real estate agent as commission. The buyer pays the registration fees while the seller pays the agent's commission. Each party pays for their lawyers. There are no stamp duties. There are only two procedures needed to register a property and each procedure takes a day to complete.
Tenant protection laws are neutral in New Zealand
New Zealand law is neutral between landlord and tenant.
Tenancy Laws: The Residential Tenancies Act 1986 guarantees the rights of both parties and sets the parameters of their relationship.
Rent: Landlord and tenant can freely agree on the rent, and any increases are allowed provided that the landlord gives sufficient notice or there has been no rent increase over the last six months. A tenant can call upon a Tenancy Tribunal for rental assessment if he thinks the increase is excessive.
Economy slowingNew Zealand is one of the world’s most open economies. Since the Asian financial crisis, New Zealand has experienced years of unbroken economic growth boosted by strong personal consumption.
New Zealand's economy is expected to expand by a modest 2.2% this year and by another 2.4% in 2016, according to the IMF. Economic growth was 3.3% in 2014, its strongest performance since 2007, after GDP growth of 2.5% in 2013, 2.9% in 2012 and 1.3% in 2011, according to the International Monetary Fund (IMF).
After the Asian financial crisis New Zealand experienced years of unbroken economic growth, boosted by strong personal consumption. The economy grew by an average of 3.8% per year from 1999 to 2007.
During the recent global crisis the economy contracted only briefly and mildly - by 0.8% in 2008 and by another 1.6% in 2009. New Zealand emerged swiftly from recession, after only five quarters of negative GDP.
However now there are a few warning signs:
- The Kiwi has depreciated against the surging US$ in recent months. The average monthly exchange rate stood at NZD 1=US$ 0.6567 in November 2015, from NZD 1=US$ 0.7832 in the previous year. The kiwi is expected to depreciate further until early-2016, due to falling dairy prices and strong U.S. economic growth.
- Unemployment increased to 6% in the third quarter of 2015, from 5.9% in the previous quarter and 5.6% a year earlier, according to the RBNZ. From 2009 to 2012, New Zealand’s average unemployment rate was 6.5%.
- The country’s current account deficit stood at 3.5% of GDP this year, up from 3.1% in 2014 and 3.2% in 2013 but down from 4% in 2012, according to Statistics New Zealand.
The country is also expected to return to deficit this year, amidst slowing domestic economy and a decline in tax revenues. The operating deficit is estimated at NZ$401 million (US$272 million) in the year ending June 30, 2016, compared to a NZ$414 million (US$278 million) surplus a year earlier.
Not too much should be read into these. New Zealand’s net external debt is low, at about 26.5% of GDP (2014-2015), though it increased to NZ$255.27 billion (US$171.49 billion) in Q2 2015 from NZ$247.18 billion (US$166.06 billion) the previous quarter.
Inflation was low at 0.4% in the third quarter of 2015, down from 1% a year ago and 4% in 2011, according to the RBNZ. From 2000 to 2010, inflation averaged 2.6% per year, according to the IMF.