Published 25 November 2009
While there was a boom in residential section sales nationally from 2002-07, researcher Rodney Dickens described sales in Northland as a “mega-boom”. His latest research there shows prices in all 5 settlements studied have returned to pre-boom levels.
The Northland boom released far more sections on to the market than could reasonably be developed in the medium term, causing long-term market problems: “All would have been fine if the sections sold in these hotspots were largely to end-users, although of the 5 areas (studied) this was more the case in Kerikeri.
“However, lured by the promise of quick capital gains, many buyers were spec buyers/investors and the problem now facing developers is that to a greater or lesser extent they are competing with the spec buyers/investors for the low level of demand. The problem is being helped to some extent at the moment as low interest rates & higher population growth fuel demand for new housing & sections, but this is more an urban story than a coastal story.”
Mr Dickens is now managing director of Strategic Risk Analysis Ltd, and its chief researcher. Before founding the company in 2006, he was ASB Bank’s group strategist & head of research for 5 years. He’s been a member of the Reserve Bank’s monetary policy committee, researched international interest rate behaviour at the Bank of England, was a bank chief economist at one New Zealand commercial bank and New Zealand head of research at 2 international investment banks.
In his latest Property Insights, Mr Dickens said: “The demand-supply balances vary significantly from market to market, but in general the Northland coastal section market is not close to ‘clearing’ yet – in other words, asking prices are still in general too high relative to what buyers are willing to pay.
“The section market is of major importance to the existing-house market because an existing house is just a depreciating asset sitting on a piece of dirt, so what happens to section prices has a major bearing on existing-house price prospects.”
Mr Dickens has previously examined all of Northland’s coastal settlements’ property markets. This update includes the relatively new One Tree Point-Marsden Point-Ruakaka market but excludes Paihia & Russell.
Mr Dickens said the Mangonui area was one part of the coastline where investors played a major part in funding new subdivisions, and there’s little sign of sales recovering there yet. Before the boom years, section prices in the Mangonui area were generally 30-40% below the national median section price, but at the peak of the boom they sold at a premium. He said “a semblance of normality” had returned, with median section prices in Mangonui at a 24% discount to the national median in the last year.
“However, this doesn’t mean equilibrium has returned to this market in terms of demand & supply being in reasonable balance, because there are still lots more would-be vendors than there are eager buyers. In the year to October 2009, the Real Estate Institute reported 59 sections being sold in the greater Mangonui area, while we found 498 ads for sections for sale in this area on www.realestate.co.nz, which doesn’t include either the significant number of sections people are trying to sell privately on Trade Me or the unknown number of sections developers are trying to sell direct to the public.”
Even allowing for an element of double counting, Mr Dickens said “the net result would still be a demand-supply balance heavily over-weight on the supply side.”
In Strategic Risk Analysis’ in-depth research of the Marsden Point-Ruakaka area, which included detailed analysis of 12 subdivisions, “we found over 300 sections for sale. The bulk of sections had asking prices in the $150-300,000 range, with many of these sections having neither direct beach access nor sea views. However, there were also a significant number with asking prices in the $600-900,000 range, largely reflecting the Marsden Cove marina development. Section sizes are pretty standard with the bulk in the 600-800m² range.”
Before the start of the boom in 2003, the median section price in Marsden Point-Ruakaka was just under $90,000, based on the comprehensive QV data, which was close to the median sales price in Whangarei District and a bit below the national median prices. Between 2003-05, the local median section price surged relative to the district & national medians. “This appears to in part reflect a larger increase in local section prices but possibly more important was the advent of Marsden Cove in 2005, which offered superior sections at much higher prices. Equally, the larger fall in the local median section price relative to the experience in the district & nationally since 2007 in part reflects local section prices falling more, but also in part reflects fewer of the better quality, higher-priced sections selling.”
A reasonably strong cyclical upturn in section sales has occurred nationally this year, driven by low interest rates & stronger population growth and aided to some extent by lower section prices. “The Northland coastal & resort areas will have benefited to some extent by these developments. However, the boost in demand has so far made only a limited dent in the supply side of sections in these markets. We believe these oversupplied markets will be a greater risk when the next downturn in national demand occurs.
“Ultimately, we expect the adverse demand-supply balances to result in median section prices in most, if not all, of these Northland areas being lower relative to the national median section price than was the case before the boom, but it looks like being a slow adjustment process.
“When would-be vendors are not willing to cut asking prices sufficiently to clear the market, the number of sales will remain low. When sale volumes are low, the sections that sell will generally overstate the ‘equilibrium’ or ‘clearing’ level of prices. This is because the relatively small number of sections that are selling are generally selling to the small group of buyers willing to pay top-dollar.
“However, with the volume of sales low, it means it will take a long time to sell the number of sections in search of new owners, which means the adjustment in sections prices will be a drawn-out affair, although part of the adjustment will come via inflation eating into asking prices.”
Website: Property Insights, Northland update
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Attribution: Rodney Dickens’ Property Insights, story written by Bob Dey for the Bob Dey Property Report.