Intensification may be the way of the future, but apartments have had a hard run over the past few years. In places like central Auckland, the dearth of international students saw the inner-city turn into a ghost town. Many of these apartments are now used for social housing, but as the borders open again it’s likely international students will start to return.

Sales prices have been shrinking. For example, 40m2 apartments in the Volt on Queen Street were selling pre-pandemic for $400,000. One recently sold for under $300,000 – about a 25 per cent drop – causing shock for investors, although City Sales sales manager Scott Dunn can’t see them falling any further.

He says that cashed up buyers have little competition in the market. Two-bedroom properties with a car park are selling fast, while bigger, leasehold and leaky apartments that need remediation are taking longer to sell. “There are some fantastic deals around the CBD,” says Dunn.

And although the apartment market has not been rosy, there are signs of it turning around. Property commentators believe it is near or at the bottom of the dip. And when prices slump, opportunities abound.

Tax Changes

In Auckland, 12,040 new residents moved into the city centre over the past three years. The city centre’s population is growing at six times the Auckland region. The city centre had 1,500 residents in 1991, 45,000 by 2017 and the 2050 median growth projection is 60,000, with a high estimation of 80,000.

Wellington city is home to about 20,000 people, 77 per cent of whom live in high-density housing. Over the next 30 years, the CBD will need to accommodate another 18,000 people, requiring between 7,900 and 8,800 new homes, mainly apartments.

But across Auckland, Wellington and Christchurch, apartment market sales have slowed significantly in CBDs and the suburbs, and prices have slumped by 10-15 per cent (in line with the rest of the residential property market).

The costs of holding apartments have significantly increased because of the government’s tax changes and higher interest rates. Investors with two to three properties are looking at $200-$300 a week more to hold them, says Dunn.

‘Most investors will do their utmost to hold on to their apartments’ Scott Dunn

“Most investors will do their utmost to hold on to their apartments. It’s easier for those who have a portfolio or two or three studio apartments as they can flick one off and use the money to lower the mortgages on the others.”

City Sales had a rush of new sale listings mid-year as sellers could see the market declining. It was noticeably harder to connect expectations of seller and buyer, but Dunn says a substantial number of sales were closed in August, when usually business peaks in February/March.

Auckland’s CBD apartment sector has always been dominated by investors who have a 70-80 per cent market share. “They had a feeding frenzy when mortgage interest rates were at about the 2 per cent mark. Those mortgaged up to the hilt have been selling,” says Dunn.

Prices range from $150,000 for a leasehold or leaky apartment to $2 million in the mid-range and $10-$12 million in Herne Bay and Remuera. The most popular for buyers are still studios and anything with a car park, particularly as Auckland Council has indicated it is going to remove a lot of CBD street car parks and sell car park buildings. New development is scarce as off-the-plan sales have virtually stopped.

It is the same in Auckland’s suburban apartment market as investors have been sitting on the fence for most of this year, says Pete Evans, national director residential investment sales, at Colliers International.

“Everything under construction is progressing, but slowly. Developers have been hit by significantly higher build costs but they are now flattening out.

“Costs shot up 15 per cent last year and developers are hoping for a better deal, if not this year certainly next year because their margins have thinned significantly on land and build costs. As a result there is just not the volume of stock being built and supply will drop in 2023/2024,” says Evans.

Brighter Future

There are a few negotiations on new build contracts at better prices this year, but the real benefits will kick in next year.

“It is difficult for developers to bring prices down, but they are also not putting them up. It depends on the margins developers are working with. Margins are pretty thin across the board.”

Developers who have a track record and are financially secure are still buying land. Those that have short-term plans, encouraged by the agreement to allow three apartments or townhouses up to three storeys high on just about any section without resource consent, and who don’t have the financial resources, will not be buying land.

As construction of new projects improves Evans believes investors will return to the market in the last quarter of this year through off-the-plan sales. “They will not be buying at lower prices, though. While build prices won’t go down, they won’t go up either.”

Those who re-enter the market, he says, will be able to pick up good stock in growth areas where infrastructure is being strengthened, such as Onehunga where a new recycling centre is being built. The Onehunga Workingmen’s Club site is being redeveloped into apartments. A total of $69 million is being spent on a bus and rail interchange for Manukau and Papatoetoe, and new stock will go seaside, such as Long Bay, where investment is always good.

In the past decade there has been significant growth in apartment living in Wellington city. This has been driven by public demand and by the need for more intensified development of available inner-city land, says Nicki Cruickshank, Tommy’s Wellington sales director.

Victoria Street in the CBD now has 14 apartment towers. Apartments in the capital are mainly clustered along Victoria Street and Oriental Bay.

Off-The-Plans

But Cruickshank says the flurry of apartment developments in the past decade is now virtually non-existent. “Developers are not buying land. A couple of developers who had apartment projects on their books have pulled out and sold the land.

“The high cost of building has made the cost of buying off-the-plans too expensive for investments to ‘stack up’, particularly with interest rates doubling in the past year, and no signs of them stopping.”

Cruickshank estimates developments were driving about 20 per cent of total sales. “But this has fallen off in the last few months to probably single figures.” She says the market is close to bottoming out, but there are prime opportunities for investors willing to speculate on apartments. At the height of the price peak a two-bedroom/ two-bathroom home, depending on quality, was selling for an average of $1.1 million. It now sells for $900,000, down 12-15 per cent.

Cruickshank says prices have a little bit further to drop.

“The charge down from the peak was quick and I expect prices to rise just as quickly, even though there are higher interest rates. Property buyers do adjust to higher rates reasonably fast.”

The only people still buying off-the-plan for the few developments still to go ahead are speculators and investors who have finance, says Cruickshank. Investment buyers have, however, pulled back drastically where once they were one of the biggest purchasers of apartments for rentals.

Rentals are not returning the required income to investors now that interest rates have topped 5 per cent plus and rents have dropped about 10 per cent.

“Investors need a 6-8 per cent return to make owning rentals worthwhile. The only reason some are still buying are for capital gains, although they are thin on the ground.”

Garden City

Investors are eyeing up Christchurch as the best place to buy apartments as prices skyrocketed last year in Auckland and Wellington.

The Garden City is different to the other cities; it doesn’t have a big apartment sector. Although 8,000 residential property sales were transacted in the past 12 months, just 171, or 2.1 per cent, were for apartments, which means anything above two levels.

Apartments made up just 10 per cent of new Christchurch homes consented after 2011. Last year, for the first time, more townhouses were consented than stand-alone houses, but only 5 per cent of these consents were for apartments.

Bayleys investment sales specialist Angela Webb says the city’s market is made up of hundreds of two-bedroom apartments, and townhouses, which are often regarded as apartments in Christchurch because of the building height limitations introduced across much of the city after the earthquakes.

Webb says unlike other cities, Christchurch housing has always been affordable and is still affordable, so apartments have not really been needed to overcome affordability issues. In the central city, where most of the apartments have been built, the median sale price is $614,000, and median rent is $514 a week.

One to three-bedroom apartments are renting for $290-$800 a week, giving a return of 5 per cent. “Those returns are stronger than anywhere else,” says Webb.

Garden City apartments appeal to a mixture of buyers with owner-occupiers favouring single-level apartments and people downsizing wanting to be in the CBD and fringe near Hagley Park and the Avon River.