Why have properties in NZ become so expensive?

Despite a slow start to the year, REINZ’s House Price Index report shows New Zealand’s property market to be picking up speed, with property prices set to continue their uphill ascent.

Released last month, the report shows the national median property price has increased to $546,000 - a 10% growth from March 2016 and a new record median for the country. Twelve of the country’s regions have also broken current pricing records, with Auckland’s median sale price now sitting at $890,000. At almost 10 times the average national wage, the city is now considered one the most expensive markets in the world.

There are a number of factors fuelling house price inflation, but the fundamental issue lies in the mismatch between supply and demand. New Zealand is an attractive market to local and overseas investors thanks to its consistent economic growth and stable government, and population growth is predicted to remain strong over the coming years. Coupled with the high rate of inward migration, demand for property is continuously increasing, thus driving up costs. Some reports suggest Auckland alone has a shortage of up to 35,000 homes.

Additionally, low interest rates have also driven up the demand for property, allowing homeowners to take out mortgages they otherwise wouldn’t have been able to afford, and resulting in an increase in household debt.

Although some efforts are being made to create new homes, the process is both slow and expensive. With less land on offer, it can be hard to find areas suitable for large-scale developments. Many available sites are more difficult (and as a result, more expensive) to build on, and liability rules for the industry as well as council involvement means the process can be thwarted with issues. New developments also require complex and expensive infrastructure (water, transport, etc.), which can be problematic to finance.

Higher mortgage rates, LVR restrictions and tighter controls have been introduced as a means to ease the growth of the market, however, the mismatch between supply and demand is likely to support a continuous increase in property prices for the foreseeable future.