Non-resident purchases of houses: the data

Last week, LINZ released the first batch of data from the new attempt to measure non-resident purchases of property in New Zealand.

As they note, at this stage the data have considerable limitations (including around the exclusion of purchases by trusts and companies).  In addition, it is unlikely that the few months these data cover will prove to have been representative.  On the one hand, there may have been some permanent behavioural changes as a result of the introduction of the “brightline test” and the tax number requirement introduced on 1 October.  For those concerned about non-resident purchases of houses in New Zealand, if those legislative changes reduce the extent of purchases that would no doubt be welcomed, but it will also mean we will never know with any certainty what the extent of non-resident purchases was in the couple of years before the law was changed.

So our law changes may have permanently reduced offshore purchases.  But they will almost certainly have temporarily disrupted the flow of such purchases.  Some people will have rushed to get in ahead of the law changes, and others will simply have been unsettled by them, or a little confused by them.  Many regulatory changes have that sort of effect –  a (potentially material) short-term disruption, which gradually abates.  In the housing market, we’ve seen it with the succession of new LVR restrictions.

All of which means that whatever the non-resident share of house purchases over the first three months of the year, it is likely to be a low-end estimate of the number of non-resident purchases (at least until China more effectively cracks down on capital outflows, and/or runs a regime that makes people more comfortable with holding their wealth in China. As I’ve pointed out before, in normal successful countries citizens don’t rush to buy houses in other countries as some sort of safe-haven store of value.

The focus of the discussion of this issue has been on the Auckland market.  The LINZ data tell us that in the January to March period, 4 per cent of transfers involved non-resident purchasers.  In most other localities, that share appears to have been smaller, but in the Queenstown-Lakes TLA, the share was a little higher still (for the entire October to March period).

What has surprised me somewhat is that 4 per cent has been treated by most people as a small number.  In writing about this almost a year ago, I noted that –  with no data whatever to back the supposition –  it wouldn’t surprise me if 5 per cent of Auckland housing demand was from non-residents, and that in a market with fairly tightly constrained new supply, even quite small percentages could make a material difference to house prices.

And much of the discussion of this issue seems to ignore the fact that most turnover in the housing market is not as a result of people entering the market for the first time or leaving it for the last time.    Most turnover involves New Zealanders buying and selling from one another –   people changing city or suburb, or just changing their stage of life (wanting a bigger house as the kids grow, or a smaller house later in life).  The same goes for residential rental properties: the stock turns over as individual owners’ circumstances and interests change.  A well-functioning housing market will have a lot of turnover (facilitating those changes in life circumstances etc) and little persistent pressure one way or the other on real prices.    In these data, New Zealanders bought sold from each other around 40000 houses in a six-month period.

Pressure on prices arises from net new demand to the market (or –  the Christchurch story post-earthquake – net reductions in supply) not from routine turnover.  It is a bit like immigration influences on the housing market.  In a year in which there are big swings in net migration, those fluctuations might amount to only around 1 per cent of the population.  Even if migrants typically eventually purchase their own home, probably most don’t purchase in their first year or two here (especially as many initially come on temporary –  work or student – visas), so newly-arrived immigrants themselves might still only account for a quite small percentage of house sales in any year.  But previous formal empirical studies have  suggested that a 1 per cent shock to the population from a change in immigration can still produce up to a 10 per cent change in house prices.  Markets operate at the margin –  it is changes in the net new demand/supply that really should be the focus of attention.

If the average New Zealand house was turned over five or six times in the course of an adult life (eg turning over roughly every 10 years), then perhaps 80 per cent of all turnover would just represent “churn” –  a term that sometimes has pejorative connotations, but here I just mean New Zealanders moving through different phases of their lives.  If, on the other hand, most of the non-resident purchases were net new demand to the market, then 4 per cent of total turnover might be more like 20 per cent of net new demand to the market.  I’m not staking anything on that number; it is purely to illustrate that data suggesting non-resident purchases are 4 per cent of turnover may tell one very little about what role those purchases are playing in the overall balance of pressures on the Auckland market.

The issues around immigration are a bit different from those around non-resident purchases.  Immigrants need to live somewhere, regardless of whether or not they own a house themselves.  Non-resident purchasers, almost (but not quite on the LINZ measure) by definition don’t need somewhere to live here.  On the other hand, the suggestion has been  – although we don’t have the data to know the extent of it –  that many non-resident purchasers have been buying properties and leaving them empty (recall the store of value motive).  If that is happening to any material extent, the impact on the housing market is much as if they were a new migrant. If, on the other hand, houses purchased by non-residents are placed on the rental market, non-resident demand might still raise house prices materially (in a supply constrained city) but shouldn’t materially affect the affordability of accommodation itself –  ie rents.

One other limitation of the residency data is that it doesn’t give a sense of transitions from one residency to another.  For example, the data show quite a large number of purchases, and a large number of sales, by Australian tax residents.  One possibility is that most of these people are actually New Zealand citizens.  A New Zealander might have gone to Australia a few years ago, and left a house behind, unsure how long they would stay in Australia.  Finding that life has worked out well in Australia, and having become an Australian tax resident, they might now be selling the house here.  Or a New Zealander who has lived in Australia for some time, and become an Australian tax resident, might be looking at coming home, and purchases  a house here in anticipation of the move.  Given the easy migration flows between New Zealand and Australia, there is likely to be a different interpretation on transactions by these non-residents than there might be in respect of most purchasers with Chinese tax residence (a country where there is a well-known high level of capital outflows to a variety of countries, often manifest in residential real estate purchases).  Of course, if that Australian story is correct, there is a considerable element of “churn” in those transactions too, rather than net new demand to the market.

It is going to take time, and more refinements by LINZ, to really get a good sense of the situation, particularly after the first disruptive effects of last year’s regulatory changes pass.   But, for now, it is best to keep in mind that even if the offshore non-resident purchases (from people not having lived here previously or likely to live here in the near future) are only equivalent to a few per cent of total housing turnover in Auckland, that probably isn’t a small number in terms of its economic effect.  In a well-functioning house supply market it might be different –  increased demand boosts supply, in effect providing a new export industry.  When supply doesn’t work well, quite small changes in the net balance of demand can have uncomfortably large implications for prices.

 

18 thoughts on “Non-resident purchases of houses: the data

  1. For your interest Michael, we do see some ‘micro’ effects relating to the balance between investor purchases and owner purchases. In first half of 2015 Auckland investors were buying strongly to get ahead of the LVR restrictions, with their buying concentrated in the cheaper suburbs of West and South Auckland. This resulted in an oversupply of rentals specifically in parts of these areas. Over the past year we have seen some rental declines in these areas compared with higher priced areas such as North Shore, where shortages are starting to result in rising rental prices.

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  2. Yes. I do not know the answers but it is clear that journalists, politicians and too many people professing to be economists have difficulty with the concept of price being set at the margin.

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  3. Most trusts are included. As usual Labour has got it so wrong. The reason is that most trusts are set up with individual names as trustees and therefore most trusts are included in the numbers. Land titles do not record the name of trusts. they record the names of trustees.

    What is a problem is the use of corporate trustees, LTC and companies as LINZ records the name of the companies rather than the names of the shareholders. A company may have hundreds of shareholders especially when we start getting into crowd funding. Property Mogul owner Peter Kiss may have as many as 1500 shareholders a property as he would be using a company ownership structure.

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  4. and that in a market with fairly tightly constrained new supply, even quite small percentages could make a material difference to house prices

    Yes. I argued this point on Q+A last Sunday, and was thoroughly sneered at by the other guest on the show, who seemed to be convinced that the only issue was land supply.

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    • Auckland region is 5000skm and is full on 1.5million people. Houston is 10,000skm with 6.2 million people. It is not about land supply. It is about the lack of infrastructure spending and how the height of buildings is being restricted by the visual height limits of 52 sacred mounts.

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      • Also we have a problem building highrise. I suspect the silicon and rubber sealants between joints that allow movement due to Earthquake proofing deteriorates over time and creates leaking highrise buildings.

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    • Having viewed the consultation documents around 600 plus pages of the Unitary Plan. Fletcher Residential initiated amendments appear again and again and again. It is also institutional buyers, ie the giant corporates are also buying up Auckland property. The Unitary Plan allows for multiunit and multilevel sites of what are now ordinary single residential houses on large plots. Any developer or builder that is not buying Auckland property is clueless.

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      • No doubt true, but if it was the dominant part of the story in areas where greater intensification is likely, it should be offset by material falls in house and land prices on the periphery of Auckland. I’m not sure there is any evidence of that at present.

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      • Michael, all the Unitary plan zoning, mixed housing urban, apartment and suburban which covers almost 80% of residential housing throughout the entire Auckland region would allow at the very least a second dwelling which is a minimum size of 30sqm for a separate dwelling with a separate kitchen, note minimum ie you can built a 250sqm second dwelling if you want. There is no periphery residential housing zone that would not be multiunit.

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      • yes, that’s understood, but it still means land on the periphery will become relatively less valuable. The value of intensification is much greater for land near city centres, and to the extent it happens it will ease pressure, and hence land prices, at the periphery.

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    • I just watched that discussion. A particularly unimpressive performance by Richard Prebble – including that it can either be a structural supply problem or a bubble, but can’t really be both.

      (Disagree with you about negative gearing though)

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  5. There appears to be an element of “we really don’t want to know” its all too hard

    The number of transactions arising from the defective LINZ questionaire was just over 1000. Some of the responses were incomplete, some were defective, for some it was suspected that the respondent was not sure of the question

    OK. So there were a mere 1000 that comprised the results population. With 3 months of responses available that even LINZ felt questionable you have to ask the question why they didn’t pick up the phone and ring either the estate agent or conveyancing solicitor and asked the question, and if they couldn’t answer get the phone number of the buyer – and ring them – employ 3 or 4 temps for a week – not too hard – in fact it is too easy

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    • All property transactions now require a IRD number. Therefore the distinction between Tax resident and non tax resident is very clear. The problem is how does LINZ establish who is a foreigner? They simply canniot get an accurate number. The separation as to who is a foreigner cannot be done by IRD. This separation has to be completed via Immigration and customs database of passport visas issue. But that matching would be seriously flawed to to possibly the use of inconsistent addresses.

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    • The conveyancing lawyer will have to collect visa status rather than tax residency to get a accurate figure. Therefore all buyers must present their passport. No passport they must present their NZ citizenship papers. Sure sounds a rather painful process for New Zealanders to have to prove their identity in order to buy a property. Labour really is barking up an administrative nightmare and costly as well.

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