Housing - Reserve Bank Moves
It’s amazing how quickly things happen. It was only a little over a year ago that I talked about the housing market recovering - Active Investment, Opportunities, Housing Market Recovers - then in November 2012 – Housing Up, Lenders Flush, Time to Borrow - and last April – Housing Strength Leads Business Confidence.
Every year is getting shorter, never seem to find the time
Plans that either come to naught or half a page of scribbled lines
Hanging on in quiet desperation in the English way
The time is gone the song is over, thought I'd something more to say
Pink Floyd – Time. Click to see video.
It’s amazing how quickly things happen. It was only a little over a year ago that I talked about the housing market recovering - Active Investment, Opportunities, Housing Market Recovers - then in November 2012 – Housing Up, Lenders Flush, Time to Borrow - and last April – Housing Strength Leads Business Confidence.
And now there’s so much talk of a “housing bubble” the Reserve Bank has had to act in an attempt to curb it. So what do we think about all this and what can we expect from the Reserve Bank’s action?
Is this any different from before?
Well maybe the place to start is whether there is a “bubble” or is this just another part of the normal residential economic cycle?
First let’s recognise the rise in house prices is less than it’s been in the past and second it’s really only Auckland and Christchurch (for the obvious different reason) that are experiencing the pressure.
Property IQ spokesman, Jonno Ingerson, speaking to the Bankers Association, said price growth of 13% year-on-year in Auckland was much less than had been seen in previous property booms. In his view we're not looking at a stressed market where a bubble has grown.
“There are still strong fundamentals that will continue to drive it up. During the 1970s, growth rates had reached 40% year-on-year”, he said. “In the 1990s, it was 30%”.
People should stop talking about a "New Zealand property market", he said, because most centres had not seen much house price growth at all. Property IQ data shows that cities such as Hamilton and Tauranga are still seeing growth of less than 4% per year.
Even within Auckland, there was a lot of variation, Ingerson said. "It's premature to say the Auckland market needs to be stopped dead in its tracks. What is happening is not exceptional."
Reserve Bank’s action
From 1 October banks will be restricted to having no more that 10% of the value of their new home mortgage lending above 80% of the value of the houses financed. For a report on the change and the reaction from the banks read the Interest.co.nz article. This is good reading and covers the rationale and reaction very well.
How effective it will be in restricting house prices is another matter. In my view it will only restrict buyers who do not have access to other ways of filling the gap. And there are ways - as we shall see later.
BNZ economist Tony Alexander believes it will have no effect on reducing prices. He says in his latest Weekly Overview “Prices are rising in response to catch-up buying from investors and first home buyers running into a worsening supply situation that will not change much this cycle given accelerating population growth courtesy of a migration boom plus an aging population placing even more pressure on the housing stock.”
He goes on to give a case for people moving out of Auckland to other, cheaper, parts of the country. So the Reserve Bank move may have the opposite effect from that intended, by accelerating the spreading of Auckland and Christchurch house price gains to the rest of New Zealand.
The supply of houses for Auckland is a topic on its own. Greg Ninness suggests the number of homes being built in Auckland needs to increase by at least 54% to keep pace with demand.
Rodney Dickens in his August Raving suggests New Zealand’s housing affordability problem is partly disguised by the low interest rates, but – for Auckland in particular - really lies in the Smart Growth polices introduced some years ago. These policies favour compact cities over urban sprawl and have resulted in extremely expensive section prices and dwelling construction being well below the level justified by population growth.
It’s a detailed article setting out the government housing initiatives aimed at getting section prices and new housing costs down. Much of the promises are clearly political and while the government plans to have the Bill passed by September, the Auckland City Council still has to formally agree to the Auckland Accord.
In Rodney’s view the median house price in Auckland needs to roughly halve but the Accord on its own won’t achieve that because of the limits on where Special Housing Areas can be approved and partly because of the scale of development contributions and other council fees. He give a link to a Herald article that gives an example “albeit something of an extreme one” of how much council and other fees have added to housing costs.
In any event his Raving argues “that even if the government initiatives are reasonably successful in getting down new housing costs it will probably take some time for this to filter through to lower existing property prices in general and especially in inner city areas.”
Interest rates
Meanwhile according to the Reserve Bank’s latest survey of business managers, inflation expectations here have risen since the Bank moved to take pressure of monetary policy by imposing the tougher home lending restrictions.
The survey shows firms have increased their expectations for a higher 90-day bank bill rate, often seen as a proxy for the official cash rate, predicting it will be 2.7% by the end of September, and rising to 3.2% by June next year. The OCR is currently at 2.5%.
Like many economic commentators here and overseas, Tony Alexander believes eventually reserve banks “will be forced into a period of catch-up increases in interest rates which will likely scare the beejeebers out of those who have not yet seen our central bank in full action.”
In his view there seems little reason to believe that fixed borrowing costs are going to jump massively. What is different now compared with 1 – 3 years ago, is that risks for interest rates have shifted decidedly from falls to rises and the yield curve is steepening. What that means is floating rates are holding steady because they are determined mainly by current monetary policy settings – a cash rate unchanged at 2.5% - while fixed rates are rising in anticipation of floating rates going up.
He says “Good luck if you are planning to go through this cycle on floating rates. Last cycle they peaked at 10.9%, the one before that 11.3%. Best pick this cycle? 8.5% with massive uncertainty. History shows a strong tendency for us forecasters to under-estimate cyclical interest rate peaks and the longevity of tightening monetary policy cycles.”
Stephen Toplis, Head of Research at the BNZ, is comfortable with the action the Reserve Bank has taken but says “If the Bank really does believe that house price inflation is getting out of control the accepted wisdom is the rising interest rates will be most effective in limiting it.”
He argues if the housing market was overheated because the banks are supplying too much credit, then restricting borrowing will help. But if it’s because the cost of money is simply too low then 85% of home borrowers and nearly every other borrower in the economy will not be adversely affected by the LVR announcement. In fact, they will face lower interest rates than would otherwise have been the case. See his article here.
In some ways we’re already seeing some pressure on interest rates. The ANZ just increased its medium and long term fixed home rates and is the first of the big banks to move above 7% for the 5 year fixed rate. BNZ has also increased rates. These rises are largely a result of wholesale funding costs.
So reading the above you would have to say this time the rise in house prices is very much a supply driven problem in Auckland and simply the availability of cheap money elsewhere.
Market takes a breath
My feeling is the housing market has stabilised, and it’s done it on its own as buyers take a breath, as is shown in the recent ASB Housing Confidence Survey. This is a good read and shows:
- Fewer people see now as a good time to buy as competition between buyers heats up.
- 44% expect interest rates to rise over the next 12 months.
- Housing demand has picked up over the last couple of years.
- Housing supply has remained low and slow to respond to higher demand.
- House prices are picking up in a sellers market.
- Strong competition between buyers makes for a tougher market to enter.
- Interest rate expectation lift as OCR hikes likely from March 2014.
- The Reserve Bank will get creative in dealing with financial stability risks from house price increases.
Bank lending restriction won’t have much effect
I’ve quoted Olly Newland before and he’s been round longer than most of us. His view has always been the best time to buy a house was last year and that hasn’t changed. See interest.co.nz article.
He’s under no illusion that the Reserve Bank’s actions will reduce house prices. “The proposed measures may sound practical and targeted”, he says, “but I am convinced that if actually implemented, they won’t make a blind bit of difference. In fact, they will play into other sectors of the property market … to their great advantage.”
“There is nothing new about these sorts of restrictions. We had them all through the 1960s, 1970s and 1980s” he says. “In those ‘bygone days’ the maximum that could be lent by way of mortgage was two-thirds (66% – the horror!) of the purchase price, or valuation, whichever was the lower. (Some things never change.)The deposit required, one-third (33.33%, and yes, it was that precise) was impossible to find by many purchasers.”
All sorts of mechanisms were used to fill the gap. These included:
- Getting the vendor to leave in a second mortgage.
- Friends and Family bridge the gap.
- Multiple credit card loans.
- Personal loans.
- Non-bank or second tier financiers not restricted by the new rules.
He also gives some other colourful methods used (that neither Olly nor I would recommend).
Happy to hear from you
I’m always happy to hear from you if you’d like to comment on the matters raised in Capital Comment – or of course it you’re looking for debt or equity for business or property.
Cheers,
John Paine
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
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Email john.paine@tbkcapital.co.nz