New Zealand is Attractive and Has a Fast Covid Recovery Rate, But House Prices Are A Big Turn Off

By Veselina Dzhingarova

New Zealand’s property market is so expensive even the most dilapidated home will set you back almost $2 million.

Thanks to its natural beauty, a relatively low population density, an exemplary handling of the pandemic and a dynamic prime minister, New Zealand is no doubt a great attraction to tourists and investors. But perhaps that’s until you discover it has one of the least affordable housing markets in the world. 

“Brutal” is how 32-year-old house hunter and insurance case manager Femke Burger summarises it.

For over 10 months, Femke has been searching for a home in Wellington, the nation’s capital, often competing with as many as 100 other house hunters at public viewings.

After about 60 properties that caught her interests and 10 offers she made that got turned down, she finally succeeded. But during that time, home prices sky-rocketed, forcing her to increase her original budget of NZ$700,000 ($493,000), just to have any real bidding chance.

Femke said those 10 months cost her more than NZ$150,000 in terms of home value rates. She said it was perplexing and made little sense to her. “I’m offering everything I have — I won’t have any savings left in order to make this happen, and that’s a really scary prospect,” she explained.

New Zealand now has one of the most costly real estate markets reactive to income in the OECD. Auckland, the country’s most populated city (home to a third of its people) ranks number four on the list of the least affordable cities in the world, according to data by urban planning consultancy Demographia.

There’s a real apprehension that property prices here may have gone into a bubble, as they spiked more than 20% in the year through February. This meant the national median jumped to NZ$780,000 and incredibly NZ$1.1 million in Auckland.

Analysts have blamed the surge in prices on the excessively loose monetary policy that has surged borrowing costs and saw an increasing number of people focussing on property and other high-yield investments instead. 

The effects are felt worldwide with constantly rising value prices, but nowhere comes close to the hike in New Zealand, which defeated the Covid-19 pandemic and is recovering faster than most countries.   

Mind-boggling amounts continue to be sunk into the real estate market week in, week out.

A real estate website, OneRoof reported that just this March, a simple three-bedroom bungalow in the high-brow suburb of Greenlane in Auckland sold for a previously unimaginable NZ$5.98 million at an auction - a stunning NZ$2.6 million higher than the valuation by the local council. 

Even tumble-down properties, called “dungers” in New Zealand, are in high demand. 

In January, a dilapidated, three-bedroom apartment with fading paint and boarded-up windows was bought at NZ$1.81 million in Avondale, a suburb in Auckland, which is a reflection of the value the property is built on.

The Prime Minister, Jacinda Ardern, who won acceptance and election on the promise to bridge the gap between the rich and the poor, is under immense pressure to ease the market as first-time buyers are increasingly locked out.

In a country where the average adult is expected to own their homes, ownership currently stands at 65% - the lowest rate since the 1950s. Government statistics show that people who own their own homes are 14 times richer than non-homeowners.

But Kathryn and Blair Duckett, a couple in Wellington, are struggling to catch up with the homeownership cultural expectations. It has been tough putting aside the required 20% deposit for a mortgage while raising three boys and paying for standard accommodation in a neighbourhood with good schools. 

Wondering how he can manage to save NZ$200,000 for a deposit and live, Blair, 46-year-old surveyor, said he and his wife would have had a house years ago if they didn’t need a deposit. “We can service a mortgage, we have never missed a rent payment,” he said. 

On her part, 47-year-old Kathryn explained that they have prioritised their children’s education over buying a house - although having to make that choice still hurts. 

They don’t tell people they’re renting. “It’s a stigma,” she said, adding that people tell them they’ve been left behind.  

Infometrics reveals that the average property price is now 6.7 times higher than the median yearly household income. To stabilise again to a multiple of about three, the economic estimates in there dictates there would need to be a 55% decrease in property prices or a 123% increase in household incomes.

In order to level the playing field toward first-time buyers, the government is implementing a set of measures that aim to deter investors who have typically benefited from tax breaks and easily outbid newcomers.

However, the scale of the problem is overwhelming.

As part of the move to slow house price gains, Finance Minister Grant Robertson, in February, passed the responsibility to the central bank, which was tasked with giving more attention to the property market when drawing up monetary and financial policy. 

This could mean investors will be subject to further macroprudential restrictions, such as debt-to-income ratios and limits on interest-only loans.

Also, last month, Ardern tightened up tax rules that encouraged speculative investment in home rental property. Investment property profits will be taxed on a 10-year basis instead of five years from now on and investors will no longer be able to claim mortgage interest as a tax-deductible expense.

Kelvin Davidson, a senior economist at property research company CoreLogic, anticipates that the measures will have little effect on the prices in the short term, given the current weight of demand. “What we’re expecting is a slowdown in sales, not as much activity, but in terms of prices just slower growth, not falls,” he said.

Some have criticised the changes as likely to increase the supply of rental properties and drive up rent as landlords try to make up for lost grounds in property income. It said the real issue is a deficiency in property supply.

According to Brad Olsen, senior economist at Infometrics, New Zealand needs to experience sustained periods of high building levels to shore up the gaps before the housing crisis is addressed. “The government’s housing package is an important start to addressing housing concerns, but more is needed to free up land for more houses,” he said.

In the Ducketts' view, the government's measures have little benefit for them. Blair says it’s just like scratching the surface. “You get your hopes up again and again and then they get dashed. And eventually, you just give up,” he said. 

Femke Burger has, however, finally found the house she's been looking for. She was able to get her two-bedroom, semi-detached apartment offer accepted last week for 825,000 NZ.

She said she spent significantly more than her initial budget, and she bought something she never would have thought of at the start. “There have been some significant compromises, but I’m still really happy,” she said.