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Sydney house price downturn could dampen Auckland prices

Wednesday 12th December 2018

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The sharp fall in house prices in Sydney this year, down almost 10 percent from their peak in 2017, could have a dampening effect on Auckland's property market, although the shortage of local houses, lower mortgage rates and still elevated net migration will counter any impact.

ASB Bank economist Mark Smith said New Zealand house prices broadly track those in Australia and prices in Auckland and Sydney are closely related, a relationship that has tightened since the GFC a decade ago.

“Evidence of a long-run relationship between trans-Tasman price levels is a little murkier,” Smith said in a note.

“It could be that determinants of New Zealand and Australian house prices, including mortgage interest rates, may be moving more in sync with each other.”

Across Australia, house prices are down 4 percent from their peak with Melbourne prices experiencing a slightly greater 6 percent decline, but prices in New Zealand generally are still rising and Auckland prices are down only slightly.

Smith said the recent declines in Australian house prices need to be viewed in the context of their more than 40 percent increase between early 2012 and late 2017. Sydney prices rose 75 percent and Melbourne prices were up 60 percent over that period.

Australia’s Reserve Bank has attributed the recent declines to stretched affordability, slowing investor demand and supply-side factors – the building of more houses – and restrictions on foreign buyers, all factors that are impacting New Zealand house prices too.

But Smith said the evidence shows that New Zealand house prices change more slowly than those in Australia in reaction to the same sorts of shocks.

A longer run view shows growth in New Zealand house prices has outstripped growth in Australia.

New Zealand prices have increased almost five-fold since the early 1990s compared with nearly three-fold for Australia. Over the past decade, New Zealand prices are up 80 percent compared with Australia’s 45 percent increase.

“The increase in relative New Zealand house prices is despite New Zealand mortgage interest rates showing a structural decline of a similar magnitude to those in Australia.”

One reason for that difference is that Australia has been building at the rate of about nine houses per 1,000 people while New Zealand has been building only seven.

“The impulse responses from regional models suggest that increasing dwelling construction tends to dampen house price inflation, although its impact differs by region,” Smith said.

“Increases in dwelling construction tend to feed through more quickly to Wellington house prices than they do for Auckland. The peak impact of higher Auckland residential construction on dwelling prices is about three years, as opposed to about two years for New Zealand and about six months for Wellington,” he said.

“Melbourne house prices look to be particularly responsive to additional dwelling supply. Surprisingly, there is no clear relationship for Sydney house prices.”


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