Plummeting prices in the Sydney housing market might be sending shivers down the spines of Auckland home owners, who wonder if they’ll see the same thing happen to their homes’ values.

CoreLogic’s new CEO Ben Speedy says the Sydney and Auckland housing markets both saw significant growth in values from 2013 onwards.

“That was driven by more accessible credit, low interest rates, migration, a strong economy, and low unemployment,” Speedy says.

“They were the drivers of property values going up in Sydney – and also the reason property prices went up in New Zealand.”

CoreLogic’s Australian data shows that since then, property prices have dropped a long way in parts of Australia, including over 12 per cent from the July 2017 peak in Sydney.

But Speedy says the two property markets are different.

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The apartments effect

“A lot of this effect in Sydney is from apartments. A lot of apartments were built in the metropolitan areas of Australia and the economy there has now turned.

“There’s not the demand for those apartments now. People were buying off the plans and then when it came time to settle, the apartment was worth less than what they’d agreed. They then had to make a decision, do they settle, do they still want to purchase that property?” Buyers pulled out, leading to a glut on the market and a price drop.

Now, in those metro areas of Sydney and Melbourne, there’s more supply than demand, he says.

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Don’t panic

There are plenty of apartments being built in Auckland too, but nothing to the scale of Sydney or Melbourne. That means less cause for panic, says Speedy.

“We’ve seen a prolonged period of no growth in Auckland and that weakness is likely to continue but, at CoreLogic, we don’t see a crash at this time.

“There’s still a shortage of property in Auckland, and that should see property prices hold in the near to medium-term,” he says.

“There’s migration: people still want to come to New Zealand to live, and there’s domestic migration. Unemployment is still really low, and there are lots of opportunities in Auckland.

“Those economic drivers apply, so we’re in a stronger position in New Zealand than Australia is at this point in time.”

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Our regulations worked

Speedy praised the efforts of former New Zealand Reserve Bank governor Graeme Wheeler, who in 2013 announced changes to how much investors could borrow, with loan-to-value ratios (LVRs). He says this meant Kiwis are faring better now than their Australian neighbours.

“There’s been some pretty prudent governance that’s happened in New Zealand over the last few years. The LVR changes limited speculation in the market and required people to have more capital to be able to buy property, whereas Australia hasn’t had that.

“It’s only been in the last two years that they’ve started to look at that, largely driven by Australian Prudential Regulation Authority (APRA) rules on banks.

“To put some statistics around all of this, in 2013, high loan-to-value lending (those with less than 20%) deposit was running at about a quarter of activity in both Australia and New Zealand.

“Late that year, New Zealand introduced the first iteration of the LVR speed limits, and this riskier lending plunged to 5 to 10 per cent of lending, where it’s stayed ever since.

“In Australia, high LVR lending stayed much stronger for longer.”

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Interest-only loans rife in Sydney

In Australia, you could still buy a property with a minimal deposit and borrow the balance interest-only, he says. When property prices decrease, those people are more exposed.

Rules in New Zealand meant you needed to hold 40 per cent equity on a rental property (although that was eased to 35 per cent, and again to the current 30 per cent). There are restrictions on how long you can keep paying interest only.

“If the market turned, you still had quite a lot of equity in the property,” Speedy says.

“If you can cashflow your property, you can always hold out till the property price comes back. As soon as cashflow becomes short, if you don’t have as much money, you have to make some quicker decisions around letting a property go.

“All of a sudden people will be forced to sell and that will start to erode property values.

“By and large, the prudent way that we’ve governed lending in New Zealand has been a key thing. I think Australia could have learned from us a lot earlier.”

The US landscape

Meanwhile in the US, where CoreLogic has its head office, Speedy says growth has been running at five to six per cent. But that’s expected to drop back to three or four per cent this year.

“Interestingly, in the US they predominantly fix home loans for the life of the loan.” This approach isn’t an option in New Zealand, where Kiwis prefer to fix for shorter periods of one to two years.

Meanwhile, in Australia, loans are predominantly floating, leaving homeowners more at risk when rates rise.

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Published 20 March 2019

Story by Brenda Ward, JUNO

Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement here. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with a financial adviser. All content is correct at time of publication date.