The New Zealand central bank’s worries about the rampant housing market in Auckland just ticked up a notch, warning yesterday of the risk of a “damaging correction” that could have serious economic implications.
For more than two years, the Reserve Bank of New Zealand has been struggling to rein in rapid acceleration in house prices with a variety of tools including ever-larger minimum deposits that have had little impact on the market, except to lock out first-home buyers.
Its focus has been on Auckland, where house prices have surged an eye-watering 27 per cent in the past year. Lending restrictions are tighter for Auckland than other areas.
It says there is increasing potential for a sharp price correction in Auckland because prices have become increasingly stretched, relative to household incomes and rents.
“The increasingly stretched Auckland market is at risk of a damaging correction, especially if economic conditions deteriorate,” the RBNZ says in its semi-annual financial stability report.
“The interaction between low mortgage rates, high household debt, and increasing house prices poses a significant risk to the financial system,” the central bank concludes.
Those risks are not dissimilar to the ones posed by the Australian housing market, where record low rates have fuelled rapid price gains in Sydney and Melbourne (15.6 per cent and 12.8 per cent) and driven record levels of household debt.
However, Australian authorities have had rather more success than their New Zealand counterparts in cooling investor demand, with APRA’s hard line on growth in investor lending given a boost by the banks’ hikes in investor mortgage rates.
Auction clearance rates are falling in Melbourne and Sydney, and this week’s housing finance figures showed the steepest monthly decline in investor lending since 2009, although part of that could have been caused by the shock of the unexpected out-of-cycle rate rise initiated by Westpac.
Glenn Stevens seemed unperturbed by the implications of the major banks’ move for the housing market, saying last week the combined rate rises across the total loan books amounted to retracting only about one-quarter of the RBA’s easing this year and did not require an offsetting policy response.
For New Zealand, the worries over distortions in the housing market have centred on investor activity, since, as governor Graeme Wheeler points out, investor loans have a higher tendency to default in the event of a major downturn in the property market.
He is concerned that a sharp downturn could undermine financial stability because of the banks’ large exposure to the Auckland market.
Auckland has become one of the most expensive cities in the world as house prices surged while incomes remained relatively steady. The price-to-income multiple for Auckland is up to 9.2, a massive surge from 6 in 2011, the bank says.
The RBNZ brought in new restrictions on November 1 on investor lending in particular that will now require a 30 per cent deposit instead of 20 per cent, after introducing blanket loan-to-valuation restrictions across the market in October 2013.
While there was market chatter that it would introduce new limits on total debt-to-income multiples as well yesterday, it abstained but warned banks to take “particular care” to test loan serviceability.
For the first time, the RBNZ says it’s starting to worry about house prices outside of Auckland, in places like Hamilton and Tauranga where prices are up 18 per cent and 14 per cent respectively.
Bank of New Zealand senior economist Craig Ebert told me the price inflation is compounded by a sharp increase in the volume of sales in secondary areas, with turnover up by 50 per cent to 60 per cent on a year ago.
That suggests that low interest rates are playing a big part in the market’s gains beyond Auckland and foreign buyers (read Chinese buyers) are not solely responsible for extreme price gains.
With the RBNZ’s latest cut in the cash rate bringing mortgages down to fresh lows, the spread of the housing bubble outside of Auckland points to an increase in risks to the economy if the market stalls.
Looking across the Tasman, the Reserve Bank of Australia will be closely watching the impact of the RBNZ’s September cut in rates on housing and thinking very carefully before it makes any such move at home.