Archive | Housing costs

Melbourne sees still higher land prices & shrinking house lots as population hits 5 million

Published 2 September 2018
Residential land in & around Melbourne took an average 24 days after hitting the market to find a buyer in the first quarter of this year, residential marketing company Oliver Hume said in its latest research, out on Friday.

By comparison, 5 years ago it took about 6 months, and the timeframe got down to 21 days in the second half of last year.

Oliver Hume measures the period from when land is released for sale by a developer until it’s contracted by a buyer.

The company said the median lot price in Melbourne’s key growth areas had risen by 4.7% ($A14,000) [prices not stated, but I calculate movement was from an average $A295,000 to $A309,000] just in the first quarter of this year, but appeared to have slowed since then. Meanwhile, sections were getting smaller, down from an average 406m² in December to 400m² in March.

But as the country’s city & total populations hit new marks, CoreLogic & the Housing Research Association say in their latest research, out on Friday, the population growth appeared to be easing, and residential land prices appeared to have peaked late last year.

In Sydney, they said, “typical” residential development land prices peaked at $A479,000/lot last September and fell to $A467,500 in the March quarter.

In Melbourne, the price of a “typical” lot reached a new high of $A359,000 in the March quarter. CoreLogic said that was up 29.3% from a year earlier.

One obvious cause is population growth. According to the Australian Bureau of Statistics, Melbourne’s population climbed from 4 to 5 million in 8 years, reaching the 5 million mark yesterday.

According to the official research, Sydney is still ahead, at about 5.2 million, although research by the independent Population Australia has it above 5.6 million.

Australia’s population has risen by 1 million in 31 months to 25 million, reaching that mark on 7 August.

Oliver Hume, 31 August 2018: Melbourne and market robust but price growth slowing
Housing Industry Association

Attribution: Oliver Hume release, Australian Bureau of Statistics, Population Australia, Housing Industry Australia.

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Inflation the highest since 2011, housing index rises nationally

Statistics NZ said today the consumers price index (CPI) increased 2.2% in the year to the March quarter. That’s the biggest annual increase since the September 2011 quarter, the last quarter affected by the rise in gst from 12.5% to 15%.
Housing-related prices rose 3.3%. Prices increased for newly built houses excluding land (up 6.7%) and for rentals (up 2.3%). Newly built houses, excluding land, were up 8.0% in Auckland and 3.6% in Christchurch.
Transport prices (up 3.5%) made the second largest upward contribution. Petrol was up 12%, but partially offset by falls in other private transport services (vehicle relicensing fees).

Statistics NZ prices senior manager Jason Attewell said: “Rising petrol prices, along with the annual rise in cigarette & tobacco tax, lifted inflation. Petrol prices in New Zealand are closely linked to global oil prices, and cigarettes & tobacco taxes rise in the March quarter each year.”
For the March quarter, CPI inflation rose 1%, following a 0.4% rise in the December quarter.
Rents increased 0.8% in the quarter as 84% of the sample showed no price change. Auckland rents showed a 0.7% rise.

Auckland house price index still high, rising nationally

Statistics NZ’s index on house purchase prices in Auckland rose sharply from a 5.9% annual gain in the first quarter of 2015 to peak in the third quarter with an 8.5% rise, dropped to a 7.2% gain in the December 2015 quarter then climbed again over the next year to 8.2% in the December 2016 quarter. In the year to the March 2017 quarter, the gain was less, but still 8.0%.

Nationally, the house purchase price index has been rising – with occasionally lower gains – since the second quarter of 2014, when the gain was 4.6% over the same quarter a year earlier.

In the March 2016 quarter, the national gain was 5%/year. Since then, it’s climbed to 5.6%, 6.3%, 6.5% and, in the latest quarter, 6.7% compared to a year earlier.

Attribution: Statistics NZ tables & release.

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Economist sees scope for house price fall – my picture more complicated

Infometrics chief forecaster Gareth Kiernan said yesterday the economic consultancy saw “scope for a 12% drop in property values by the end of 2020”.

That turned into this heading: House prices to fall 12% by 2020.

A 12% price fall in 3 years – or a multitude of trend changes? I interpolate:

Some have fallen that much this year while others have been taken off the market because the windfall window has passed. How & what you measure makes a big difference.

When the America’s Cup was first touted as coming to Auckland in the 1980s, my house’s value – along with every other house in the neighbourhood – rose overnight by a million dollars. But few houses actually went on the market to catch this windfall, a handful of homes sold at escalated prices, the cup event didn’t come and the market shot back to where it had been. Did homes drop in value? They didn’t in reality rise.

Auckland was unusual in the wake of the global financial crisis of 2008 – on Quotable Value’s figures, a drop from double-digit price growth in 2007 to a decline of about 7% both nationally & in Auckland in 2008, followed by a 3% turnaround nationally in 2009 – and a rise of 7.3% for the year in Auckland.

By late 2011 – the year housing consents bottomed – Auckland’s house price index was above the level of the previous peak in late 2007, but on low turnover.

Through to late 2016, both prices & turnover rose. Turnover is now down, and you can see vendors facing hard decisions at auction. Yet, at auction this week, some apartments sold at high price levels – above $10,000/m² for secondary stock that’s now “old”. That can be attributed partly to the rising cost of construction for new developments.

The unitary plan has put another factor into the pricing equation, the ability to intensify sections that previously might have been able to take only 2 townhouses. This potential can raise the apparent value of standalone houses throughout suburbia, though it’s actually a change in land values.

Mr Kiernan raises mortgage rates as a factor below, suggesting a rise could keep some buyers out of the market. Higher interest rates or increased supply over the last 15 years, or both, would have suppressed prices. Supply is starting to increase but, while net immigration keeps rising, that supply will still fall short. That could encourage price rises while, at the same time, ordinary local buyers will tot up capital & mortgage costs which will show prices for them must come down.

Over the last 4 years, New Zealand turned – swiftly – from a net outflow of 39,000 migrants/year to Australia to a zero outflow, and a little more slowly to a net inflow of almost that number (33,900 in 2016) just into Auckland.

Those migration tides can reverse again just as quickly but, as I’ve suggested below, other factors come into play and one of those is amenity for new developments.

Kiernan: several risks hanging over economy

Mr Kiernan said the solid outlook for growth – a prediction of 3%-plus gdp growth over the 3 years to June 2019 – masked several risks hanging over the economy: “Mortgage holders in Auckland look particularly vulnerable to even modest interest rate rises that are likely to occur in the next 2-3 years. Debt-servicing costs in the city now take up a greater proportion of income than in 2007, when mortgage rates reached 8.7%. A future rise of 1.5-2 percentage points in mortgage rates would clearly stretch many borrowers in Auckland and squeeze potential buyers out of the market.”

Infometrics predicts that wholesale interest rates will gradually rise further in the next few months and that the Reserve Bank will start increasing the official cashrate by mid-2018.

“Net migration & population growth will be easing at the same time as interest rates start to rise, and this cocktail could be the catalyst for a housing market correction. Apart from the stresses on the market in Auckland, underlying demand conditions in some other regions do not justify current high prices, and we see scope for a 12% drop in property values by the end of 2020.”

Looking at the wider economy, Mr Kiernan turned first to employment: “Despite the unemployment rate edging up to 5.2% in data released this week, the labour market has been tightening across the board. The capacity constraints that have previously been most intense in the construction & tourism sectors are becoming more widespread.

“Infometrics expects to see increased wage pressures as firms battle harder to attract & retain staff, with the unemployment rate dropping back below 5.0% in 2017 and continuing to decline over the next 2 years.”

Next up, international politics: “Heightened political uncertainty also has the potential to derail New Zealand’s growth train. At this stage, the main threat to New Zealand from US President Trump’s policy agenda appears to be potential trade barriers against China.

“Mr Trump has talked about 45% tariffs on Chinese imports, which would reduce American demand for Chinese products, dampening economic growth in our largest export market and undermining New Zealand’s export incomes.

“President Trump’s proposal is a significant threat to Chinese & global economic growth, and New Zealand would not be able to dodge the flow-on effects over the following couple of years if trade barriers between China & the US were implemented.

“Closer to home, a change of government or a shift in the balance of power after New Zealand goes to the polls on 23 September could also affect our medium-term economic outlook.”

Migration factors

Bald assertions can take some filling in to make sense. For migration & population growth, the biggest factor is the Australian economy.

In the June 2015 year, Australia’s net migrant inflow was 168,000, down nearly 10% from the previous year, and 40% went to New South Wales. The country’s population rose by 338,000 (1.4%) to 24.1 million in the year to June 2016. Incredibly, those seem to be the latest figures from the Australian Bureau of Statistics.

The New South Wales economy seems to be in better shape than other states’, which may lead to a resumption of higher emigration from New Zealand in the next couple of years. A resumption of growth in Western Australia’s mining sector looks further away than that.

The Auckland construction market looks overheated and, combined with the unusually high level of infrastructure underway, will drain labour from other parts of the country and require imported labour.

One factor in New Zealand’s migration statistics that’s played down is the proportion of migrants from India, many on student visas and therefore seen as not really permanent migrants. I regard that pool of migrants differently, as a revolving supply because many return home, but still showing a net increase of over 10,000/year, at a similar level to the net inflow from China.

Statistics NZ projections

Statistics NZ’s latest regional projections show Auckland’s population growing at just over 1%/year on the low projection through to 2043, and at nearly 2% on the high projection.

One question there is whether the supply of and for housing will increase enough to dampen the increase in its price. The high growth projection for Auckland over the 5 years to 2023 would see the population up by 200,000 to 1.94 million – by an average 40,000/year, which would require an extra 14,800 homes/year to satisfy demand.

Changing trends will complicate values

The trend in new housing is toward less standalone housing and more intensive development, notably lowrise townhouses & suburban units along with retirement village units rather than a high concentration of apartments. Land values based on higher potential may change that lowrise preference.

A combination of the unitary plan allowing more building height, particularly in both suburban & regional centres, and council organisation Panuku Development Auckland’s regeneration programme for as many as 20 centres around the region could see an increase in apartment living as commercial & retail centre amenity improves.

That would shift the pricing focus away from houses in the most expensive suburbs and to different kinds of home. The expensive suburbs are likely to retain their high pricing levels because of limited supply – one reason they’re expensive even on bad days – but housing elsewhere should graduate to new ranges.

To achieve those changes, more amenities will be needed in suburban centres. As a city apartment dweller told me yesterday, Auckland fares poorly in the provision of amenities for apartment occupants compared to many cities in other countries, such as Vancouver & Sydney.

Some developments provide a pool or a gym, many don’t. Rather than an increase in inhouse amenities, and against council budgets which are very unlikely to allow for an expansion of communally owned amenities, the growth of apartment living in suburban centres could be matched by the separate private-sector provision of amenities.

That in itself would produce 2 value changes – one to reduce the value of apartments by eliminating costly inhouse amenities, the other to increase their value for proximity to externally available amenities.

Attribution: Infometrics release, my own economic date, Statistics NZ, Australian Bureau of Statistics.

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Bank economist asks how you afford the unaffordable

BNZ senior economist Craig Ebert asked in the bank’s Strategist economic outlook report on Thursday: “How are folk affording such unaffordable homes?”

He highlighted 3 points:

  • The role of low interest rates is under-appreciated
  • As debate looks everywhere else for reasons/excuses
  • True affordability?…Be careful what is wished for.

The politics of it

Under this heading, Mr Ebert said few people involved in the housing market had any cause to argue against unusually low interest rates: “Existing homeowners, and investors, obviously prefer the higher prices that low interest rates tend to bring, along with the low mortgage payments entailed. Banks depend on the strong sales turnover that low interest rates stoke. So too do mortgage brokers & real estate agents. Homebuyers, meanwhile, like to be armed with the lowest mortgage rates possible. For these reasons (and a lot more) the Government has scant incentive to ever suggest interest rates are ‘too low’. And so goes the time-honoured politics of it.”

He said the main point was that the “affordability” of homes increases exponentially as interest rates become lower & lower: “Each 1% fall in mortgage rates gives a greater & greater bang for buck. For example, if mortgage rates fall from 9% to 8%, then affordability rises 12.5%. But a drop from 5% to 4% causes a rise in house ‘purchasing power’ of 25%, in our simple example:

bnz160929-afford“Consider the example of a 5% mortgage rate coupled with a $600/week accommodation allowance (which might otherwise be put to renting). With this, one can ‘afford’ to bid up to $780,000 for a house. But that maximum bid limit drops to about $557,000 if the mortgage rate goes up to 7% (arguably what New Zealanders had become accustomed to, on average, pre-global financial crisis). That’s a purchasing power correction of almost 30%, for what would appear to be a moderate rise in mortgage rates, of 2%…..

A fundamental force

“Of course, we’ve heard it said that the interest rate argument fails to explain New Zealand’s house price inflation, in that it has had a regional pecking order to it. If the common problem was low interest rates then it should have affected all markets about the same, so the story goes.

bnz160929-rei-strat“However, this overlooks a few things. First is the fact that regional housing markets have had differing real pressures bearing upon them. Auckland, for instance, has experienced stronger population growth and arguably a greater lack of building in proportion to this. This is valid reason for house prices there to have gone up (to some extent).

“At the other end of the spectrum, some smaller New Zealand cities & towns have struggled economically, including via structural stagnation/loss of population. This would normally have entailed falling-to-low house prices (as part of a relative price shift).”

Mr Ebert said the Reserve Bank, between its June & August monetary policy statements, “yet again pushed out its foreseen house price inflation moderation.

“This now means a 25% increase in prices over the next few years, rather than 15%. With this, along with the Reserve Bank’s maintained rhetoric about further interest rate cuts, can we blame anyone for wanting to put funds into the housing market? In this respect, the bank’s forward guidance has worked only too well – sustaining quite strong inflation expectations in the general populace regarding house prices.

“This process is reinforced by the fact that collapsed deposit rates, partly on the back of low official cashrate settings, are forcing people to look at alternative places to park their money. ‘Investors’ are no different in this regard. Sure, rental yields on residential property have been bid low. But then this has not been wildly out of step with the relentless downward path of market interest rates.”

A bit rich

bnz160929-glob-bondsMr Ebert said it seemed reasonably clear that low interest rates had been affecting asset prices, via quite traditional channels. “Indeed, if you had asked someone 10 years ago what you’d get if the New Zealand economy was in reasonable shape and mortgage rates were dropped to about 4%, we’re pretty sure the answer would be house prices going nuts. There is nothing new in this. It also bears mentioning that central banks have so desired the strength in asset prices we’re witnessing, as a deliberate transmission mechanism of their super-easy policy measures.

Housing affordability – let’s be honest

Let’s imagine that New Zealand homes do become “more affordable”. Mr Ebert asked: “What does this really mean? Does it imply, for example, that Auckland’s house prices will reverse the near-70% they have risen since 2012?

“This is essentially what’s suggested by economic fundamentals – such as incomes, rents, even construction costs – if historical trends & metrics are to be respected (not that we can see any immediate trigger for such a correction). But how would a drop of that size even begin to be stomached by everyone concerned?

“The local banking system would be robust, according to Reserve Bank stress tests, even to a severe house price correction. This fortitude is being aided by the equity buffers inherent to the Reserve Bank’s loan:valuation ratio (LVR) policy. However, this is not to say that homeowners’ equity would be invulnerable.

“The LVR policy might just mean a chunkier amount of equity to lose, for latecomers to the house price party. This could, in effect, be their retirement (Kiwisaver) funds, or parents’ money, going down the dunny. This is especially so if a house price correction feeds back into the real economy, hitting construction in particular and jobs more generally (as typically becomes the process).

“It would be a deflationary force in more ways than one, in other words – one that the Reserve Bank can & should genuinely worry about. All that we have really seen to date, however, is that the moment someone suggests house prices should best come back a bit, especially in Auckland, it becomes a political football.

“The default position appears to be that, so long as house price inflation slows, even goes flat, then we can grow into these over-sized house prices. Practically, however, this means scant change in the affordability of home prices as we know it, for a very long time. This is not opinion so much as schoolboy mathematics.

“But the problem with New Zealand house prices is not even a prospective one. The real issue is the heights to which they are already ascending. It stands out like the proverbial, as much as mortgage rates do to the downside – amid an economy that is otherwise looking normal. So even if some of the broader demand forces in the housing market abate, and supply factors respond, people will still be able to ‘afford’ to pay very high prices for homes while interest rates stay this low. However, to the extent that interest rates go back up…”

Craig Ebert, BNZ, 29 September 2016: The “affordability” of unaffordable homes
BNZ, 29 September 2016: Strategic outlook

Attribution: BNZ report.

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Reserve Bank tilts at housing investors with 40% deposit call

The Reserve Bank released a consultation paper yesterday proposing changes to loan:value ratio (LVR) restrictions to further mitigate risks to financial stability arising from the current boom in house prices.

Bank governor Graeme Wheeler said: “The banking system is heavily exposed to the property market with residential mortgages making up 55% of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending.”

Under the proposed new restrictions:

  • No more than 5% of bank lending to residential property investors would be permitted with an LVR of greater than 60% (ie, a deposit of less than 40%)
  • No more than 10% of lending to owner-occupiers would be permitted with an LVR of greater than 80% (ie, a deposit of less than 20%), and
  • Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

Consultation concludes on 10 August and the Reserve Bank said the proposed new restrictions would take effect on 1 September. Mr Wheeler said they’d simplify the LVR policy by removing the current distinction between lending in Auckland and the rest of the country.

“The drivers of the housing market strength are complex and action is required on many fronts that extend well beyond financial policy. Broad initiatives to reduce the underlying housing sector imbalances need to remain a top priority.

“A sharp correction in house prices is a key risk to the financial system, and there are clear signs that this risk is increasing across the country. A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households & the broader economy.

“LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit & housing demand.

“We expect banks to observe the spirit of the new restrictions in the lead-up to the new policy taking effect.”

Mr Wheeler said the bank was progressing its work on potential limits to high debt:income ratio lending, which would be a potential complement to LVR restrictions: “We have had positive initial discussions with the Minister of Finance on amending the memorandum of understanding on macro-prudential policy to include this instrument.”

Bulletin examines cycle risks

Separately yesterday, the Reserve Bank published an article in its Bulletin on financial stability risks from housing market cycles. It said boom & bust cycles were prevalent features of housing markets in advanced & developing economies around the world, and found that macro-prudential actions aimed at mitigating risks from housing market cycles might be justified to help preserve financial stability & long-run economic growth.

Property Institute sees political motivation

Property Institute chief executive Ashley Church promptly asked the Government to consider removing the Reserve Bank’s ability to influence housing policy in light of what he described as “a politically motivated response to house price inflation”.

He said the announcement was directionless and smacked of political expediency: “This is essentially a u-turn. 2 weeks ago we were told that these measures would be introduced ‘at the end of the year’. Now they’re suddenly sufficiently serious that they need to be introduced in 6 weeks’ time? What’s changed? Could it be that last week’s serve from the prime minister has spurred the Reserve Bank into action?”

Mr Church said the announcement would make little difference to house price inflation: “Many investors will already have close to, or over, 40% equity and this will be little more than a slight speed bump.”

Links: Reserve Bank consultation paper

Bulletin article: Financial stability risks from housing market cycles

Attribution: Bank & institute releases.

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Housing: Alexander tips the direction, Spencer talks cautious measures, Church warns of investment flurry

BNZ chief economist Tony Alexander set out an extensive road map on housing yesterday, including courses the Reserve Bank was likely to adopt, before heading away for a fortnight’s holiday. In the evening, Reserve Bank deputy governor Grant Spencer mentioned these courses in an address to the Institute of Valuers in Wellington, notably mentioned some actions that aren’t in its hands, then feebly said: “In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.”

Property Institute chief executive Ashley Church said Mr Spencer’s speech “will almost certainly lead to another frantic burst of investor buying which will further inflate house prices.

“Watch the house price inflation figures over the next few months. You’ll see big price increases & a surge in activity as investors compete with each other, on price, to squeeze that last property out of their equity before the higher level restrictions kick in.

“What’s worse is that it will all be to no purpose, because the evidence of the past 2 years is that the loan:value restrictions have had virtually no impact on reducing house price inflation. So we’ll get a sharp increase in prices with no economic payoff at the end.”

The Alexander take on things

Mr Alexander looked at political dissatisfaction being expressed around the world and saw a difference here: “The National government since 2008 has been particularly adept at identifying areas of societal concern like this and addressing them. It is very unlikely that they are not taking on board the lessons of what is happening offshore. Hence the near-explicit instruction from the prime minister to the Reserve Bank to take measures to rein in the high pace of house price rises. The PM’s words are shifting.

“What is about to happen then is this. While the Labour Party will announce a set of alternative housing policies, the Government will look to stamp out this bushfire of housing affordability discontent ahead of next year’s general election. It may take some time for them to develop & announce policies which the electorate will view as likely to help address the affordability problem, and they won’t seek to push prices lower. But these policies will be announced & implemented before the general election next year. Their focus will not be on boosting demand from young home buyers, which is already backed up & strong. Instead it will be on supply and on reducing the attractiveness of purchasing property for investment purposes.

“Meanwhile the Reserve Bank will strengthen loan:valuation rules and put in place a system ready to implement debt to income controls. Maybe soon, investor buyers in Auckland will need a 50% deposit, and elsewhere 30%. Watch also for implementation of a rule introduced last month in Sweden, whereby anyone borrowing at less than 50% deposit must make minimum principal repayments and not have simply an interest-only loan.

“The collective aim will be not to suddenly boost housing supply, because that is not possible. Instead it will be to change buyer expectations of future supply & therefore future prices.”

Spencer starts with non-bank influences

The Reserve Bank’s deputy governor pointed firmly to housing boom causes that weren’t in the bank’s sphere of influence, and managed to aim at one that the Government can control: stemming the net inflow of migrants.

Mr Spencer said: “Many domestic & international factors are contributing to the strength of the market. The current record low interest rates are a worldwide phenomenon linked to post-GFC caution & very low inflation in the global economy. Also driving local housing demand has been an unprecedented net migration inflow over recent years, reflecting New Zealand’s stronger economic performance relative to many other advanced economies.”

Then he moved into the safer territory of criticising councils, people’s preference for standalone housing (which Mr Spencer noted was changing) and the building industry: “While strong demand has been underpinned by low interest rates, rising credit growth & population increases, the housing supply response has been constrained by planning & consenting processes, community preferences in respect of housing density, inefficiencies in the building industry and infrastructure development constraints. The resulting housing market imbalance has been exacerbated by New Zealanders’ ongoing preference for investment in bricks & mortar over financial investments, due in part to the ready availability of credit and a tax system that favours debt funded capital gains.

“Given the complexity of factors underlying the housing situation, there is no simple policy solution. We need to tackle housing on many fronts. The key challenge in the long run is to expand housing supply to meet the growing demand. The Reserve Bank has no direct influence over supply, but can influence housing demand through the credit channel.”

Cut tax advantage & control migration?

Mr Spencer said tax & migration policy were 2 areas of control to consider further. Unlike the Property Institute’s Ashley Church, Mr Spencer believed the brightline test introduced last October for housing investors “has helped curb short-term speculative activity in the housing market. Consideration might be given to further reducing the tax advantage of investing in residential housing.”

His view on migration was at best fluffy – long-term, only a marginal effect, something to consider. My own view on migration is that, when Australia gets back on its feet as activity in its mining sector picks up in perhaps 3-5 years, New Zealand’s migrant flow could reverse quickly. In that event, New Zealand could even be left with a housing surfeit for a time.

Mr Spencer: “Like taxation of investor-owned housing, migration policy is a complex & controversial issue. However, we cannot ignore that the 160,000 net inflow of permanent & long-term migrants over the last 3 years has generated an unprecedented increase in the population and a significant boost to housing demand. Given the strong influence of departing & returning New Zealanders in the total numbers, it will never be possible to fine-tune the overall level of migration or smooth out the migration cycle. However, there may be merit in reviewing whether migration policy is securing the number & composition of skills intended. While any adjustments would operate at the margin, they could over time help to moderate the housing market imbalance.”

What role can the Reserve Bank play?

Mr Spencer said low domestic interest rates had contributed to the increasing housing demand. Under the bank’s policy targets agreement, the central focus of its monetary policy framework is the 1-3% inflation target range.

“However,” he said, “the bank must consider whether its monetary policy choices could undermine the efficiency & stability of the domestic financial system. In current circumstances, the policy targets agreement rules out actively leaning against the housing cycle using monetary policy.

“Doing so would risk driving CPI inflation below the target range over the medium term. Conversely, further reductions in the official cashrate could pose a risk to financial stability through their effect on credit growth & house prices. While the outlook for CPI inflation will ultimately determine the future path of monetary policy, the trade-off against financial stability risk needs to be carefully considered.”

Prudential policy is the Reserve Bank’s primary policy instrument for promoting financial stability, requiring banks to hold permanent capital & liquidity buffers against shocks, and additional safety requirements when there is heightened risk of an extreme housing cycle. “Such policies are relevant for the New Zealand banking system, where residential mortgages make up around 55% of banking system assets and where a large share of total housing credit is to residential investors who have a relatively high risk profile.”

Reserve Bank’s main tools

The bank’s main macro-prudential tools include loan:value ratios (LVRs), debt:income ratios (DTIs) & higher capital requirements for housing loans (capital overlays).

“These 3 instruments tackle housing cycle risk from different perspectives and can be seen as complements. The LVRs, which are already in place, help to reduce the impact of mortgage defaults on bank earnings by increasing the security coverage on housing loans. LVRs also tighten up banks’ lending conditions, potentially leading to a slowdown in credit growth & house price inflation for a period.

“Debt:income ratios have been used internationally but not yet in New Zealand. DTIs aim to improve the safety of borrowers’ balance sheets, thereby reducing the likelihood of mortgage defaults in a downturn. In particular, debt:income limits are intended to better equip borrowers to continue servicing mortgages in the face of income losses &/or increases in interest rates. DTIs, like LVRs, tighten credit conditions, resulting in some brake on credit & house price inflation.

“Capital overlays, like LVRs, improve the capacity of banks to absorb losses from mortgage defaults in a downturn. Additional capital requirements might also slow credit growth as banks adjust to higher equity funding.

“How might these macro-prudential instruments assist in the context of the current housing market imbalances?

“The original 2013 LVR restrictions (requiring a maximum 80% LVR for most mortgage borrowers) & the Auckland investor LVRs brought in last year (reducing Auckland investor LVRs to a maximum of 70%), have had the intended effect of making bank balance sheets more resilient to a potential housing downturn. Together with the Government’s October 2015 tax measures, the Auckland investor LVRs also helped to reduce Auckland house price inflation from its peak of 27%/year in September 2015 to 12% in May 2016.”

However, Mr Spencer said activity had spilled into other regions and the proportion of sales to investors nationally had grown from 34% in January to 39% in May: “LVRs on new investor lending have reduced significantly, but new credit commitments to investors have recently been growing about twice as fast as for the overall market. Investors have effectively used equity generated by increased valuations on their existing portfolios to raise the larger deposits needed for new acquisitions.

“The Reserve Bank has a range of policy options available. One is tighter LVRs to counter the growing influence of investor demand in Auckland & other regions, and to further bolster bank balance sheets against a housing market downturn. Given the growing housing market pressures across the country, one approach would be to adopt a single national LVR limit for investors. Given that the banks have much of the relevant systems work in place, we expect that such a measure could potentially be introduced by the end of the year.

“Another option is a new debt:income (DTI) speed limit to complement the LVR requirements by improving the resilience of household balance sheets to income or interest rate shocks. A DTI limit would make defaults less likely in a downturn. Furthermore, a DTI & LVR in combination would constrain credit growth & house price pressures on a more sustainable basis than would LVRs alone.

“A DTI would be a new instrument that would need to be agreed with the minister of finance under the memorandum of understanding on macro-prudential policy. Adoption would require more analysis & systems preparation than an extended LVR. We intend to consult with the banks on the viability of a DTI policy & data issues before making a decision on implementation.

“A third option is a housing capital overlay. The Reserve Bank has already indicated that it will be conducting a full review of bank capital requirements over the coming year. We will consider whether macro-prudential overlays have a role to play as part of that process.”

Mr Spencer said finalising the Auckland unitary plan would be an opportunity to facilitate a step up in housing supply.

“On the demand side, the key drivers are population growth & easy credit. The low cost of credit is making higher debt levels affordable, particularly for investors who can deduct interest costs from taxable income. Residential investors are accounting for an increasing share of house sales & new mortgage credit.

“The bank’s interest rate policy must have regard to financial stability concerns, but the global environment is likely to keep interest rates low for some time yet. Macro-prudential policy can assist in containing the growing risk to financial stability as the current housing market reaches new extremes. In light of the growing risk, the Reserve Bank is closely considering measures that could be progressed in the coming months.”

Spencer speech: Housing risks require a broad policy response
Tony Alexander weekly overview 7 July 2016

Attribution: Alexander newsletter, Spencer speech, Church release.

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Hobsonville precinct signing overcomes treaty breach and takes hapu into new development role

The signing of a memorandum of understanding at Hobsonville Point yesterday was all pretty ra-ra until Anita Mazzolini mentioned that, within 2 years of signing the Tamaki Makaurau claims settlement, the Government tried to breach that agreement.

The settlement gave the Tamaki collective – Nga Mana Whenua o Tamaki Makaurau – the right of first refusal over Government land to be sold within the next 170 years in an area roughly covering the Auckland region.

When the Government decided last year to dispose of parcels of Government-owned land to provide for housing, it initially bypassed that settlement condition and, at yesterday’s signing ceremony onsite at Hobsonville, Building & Housing Minister Nick Smith said they were different matters.

In a release on the signing, Dr Smith said: “This memorandum of understanding is just a first step in the Crown’s land development programme in the north-west of Auckland where Ngati Whatua o Kaipara has a right of first refusal. It is important to recognise that this legal right is quite different to the housing protocol & Mahi Ngatahi agreement with the 13 iwi over other parts of Auckland.

“There is no sense in having surplus Crown Land sitting vacant when Auckland has major housing issues derived from a shortage of land. It is a complex process freeing up this land for much needed housing, but we are progressing work in a pragmatic way to get homes built as quickly as practically possible.”

Mrs Mazzolini, who chairs Nga Maunga Whakahii o Kaipara Investment Ltd, said the memorandum meant the treaty settlement was now being honoured in a joint venture between equals – the Kaipara hapu and the Government through the Ministry of Business, Innovation & Employment’s Crown land development programme and the Hobsonville Land Co Ltd as a Government-owned developer of new housing.

The memorandum of understanding signing: Building & Housing Minister Nick Smith & Prime Minister John Key at rear and, seated left to right, Crown land programme director Roger Coulson, Haahi Walker (Kaipara trust) & Adrienne Young-Cooper (Hobsonville Land Co chair).

The memorandum of understanding signing: Building & Housing Minister Nick Smith & Prime Minister John Key at rear and, seated left to right, Crown land programme director Roger Coulson, Haahi Walker (Kaipara trust) & Adrienne Young-Cooper (Hobsonville Land Co chair).

The first land going to the hapu is the Village precinct at Hobsonville Point, which has been renamed Te Uru (the west wind).

Mrs Mazzolini said it was the director of the ministry’s programme to make use of idle Crown land, Roger Coulson, who came up with the idea of the memorandum as a win-win solution, taking the hapu into its first venture in property development through purchase of the Te Uru 9ha.

“Making money out of this is very important to us, but only as a means to an end. Even the ‘affordable’ houses at Te Uru will be way beyond the means of the hapu today,” she said

Te Uru ends separation of the 2 Hobsonvilles

Hobsonville Village, given a lift with a new supermarket & small business centre, is right next to the Kaipara site at Hobsonville Point.

Hobsonville Village, given a lift with a new supermarket & small business centre, is right next to the Kaipara site at Hobsonville Point.

Te Uru adjoins the old Hobsonville village, which has also been given a new lease of life following Progressive Enterprises Ltd’s development of a Countdown supermarket and an integrated hospitality & commercial centre, now almost fully leased.

The Te Uru land will have about 400 houses built on it, replacing a number of old Air Force houses on part of the site.

The Hobsonville Land Co will manage the Te Uru development, and the memorandum will also enable Nga Maunga Whakahii o Kaipara to draw on the company’s expertise to identify additional potential development sites and assess development possibilities beyond Hobsonville Point.

The Te Uru subdivision is to proceed next summer, for completion of the first homes in early 2018. Dr Smith said the development had “a strong affordability element, with 80% having to meet specific price points.15% are required to be below $450,000, 7.5% below $500,000 and 7.5% below $550,000. These 30% affordable homes under the Axis series programme will be sold to owner-occupiers and at least 50% of these will go to first-homebuyers. The remaining 50% will be sold below Auckland’s median house price.”

This agreement just a start

“We are also exploring a development agreement involving Ngati Whatua o Kaipara, the Hobsonville Land Co & MBIE on 18ha of NZ Transport Agency-owned land in Brigham Creek Rd. MBIE has reached a preliminary agreement with NZTA on purchasing this land for the Crown land programme and it is currently being subjected to due diligence. Other sites in north-west Auckland are also being explored.”

Mr Coulson said the agreement with the Kaipara hapu was “far-sighted & broad” and would enable high quality development, “in keeping with Nga Maunga Whakahii o Kaipara’s desires & values, that will also be of considerable value to the future housing & community needs of Tamaki Makaurau.”

Hulse, Smith & Key on housing crisis & solutions

Yesterday’s signing was also an opportunity for politicians to present views on Auckland’s housing crisis, as deputy mayor Penny Hulse did, followed by Prime Minister John Key.

Cllr Hulse said the memorandum of understanding, and the accord between the Government & Auckland Council creating special housing areas, weren’t just about policies & strategies, but were about getting people into housing.

She congratulated Dr Smith for making “a wonderful transformation to housing – this is about making smart things happen…. Despite all the criticism, the special housing areas are going great guns and I think we’re on track to make that 39,000 target [of consents for both houses & sections over the 3 years of the accord, which ends in September].”

Cllr Hulse went on to say that, with a 10:1 ratio of house prices to household incomes, “We’re in a housing crisis”. While she was starting hear some encouraging words on solutions, she said the main requirement was to reduce speculation, and to do that capacity had to be built.

“Is the council doing everything it could? No, we’re not. We need to get on with the unitary plan and zone land for development.”

Dr Smith said the memorandum was a “commonsense, pragmatic response” to Ngati Whatua’s needs: “It’s easy to give speeches and tell people to build houses… but building houses that are affordable is a big challenge.”

He said the Government was looking forward to extending the Hobsonville Point development model and linking it with the Crown land programme.

While everybody was “still looking out for the magic bullet”, Dr Smith said the housing solution would come in many pieces. He expected to make an announcement shortly on one of those, the urban development strategy. Another strand was the rise in the build rate, up from a low point of 4000 houses to 9500/year, but facing a labour capacity issue to reach 13,000/year.

Mr Key said Hobsonville Point was proof that housing at scale & in a range of prices, including affordable housing, could be built close to central Auckland. The prime minister then ventured a combined potted history & economic outlook for his audience: “Auckland has pressure on its house prices because it’s doing well. That’s true right around the world, it’s not solely unique to Auckland, and if everybody was leaving and house prices were going down, everybody would be asking, ‘What’s the Government doing about it?’”

Mr Key said before houses were built, planning was required and core infrastructure had to be put in, “but there are factors that just do change. In 2008, when I first became prime minister, nobody wanted to buy a house in Auckland.” He said the Government was considering introducing new tax measures, “but long-term supply is the answer”.

That supply could come in different forms from those preferred even a couple of years ago. Mr Key noted a change in attitude in his electorate, the rural & partly urban Helensville, where people were now saying they could live with a bit of intensification.

“And that’s where the infrastructure comes into it. Pretty soon people will be able to come through Upper Harbour Highway & straight to the airport, but you need more money, you can’t just magic it up, and anybody who tells you it is [possible to just find the money] isn’t telling the truth.”

Closing, Mr Key said Hobsonville was “just a really nice place to live. We shouldn’t have doom & gloom, we should continue to work on solutions for people, including everything we’re doing getting on top of government finances.

“The alternative would be a ghost town, [but buying a house] is actually more affordable than it was 8 years ago – the prices are higher but the interest rate is lower.”

Attribution: Signing event, releases.

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Reserve Bank examines regional house price divergence

The Reserve Bank published a Bulletin article today, NZ house prices: a historical perspective, that provides historical context to the current divergence between house price inflation in Auckland and the rest of New Zealand.

The bank said the ratio of Auckland house prices relative to those in the rest of New Zealand had trended upwards since 1981, adding: “The extent of the increase in this ratio since 2009 is unprecedented. An upward trend in this ratio might be expected over time, but it is not clear how steep that trend should be, whether it is time-varying, or whether it will persist.

“Historically, Auckland house prices have trended upwards relative to those in the rest of New Zealand but, in instances when this divergence has become especially large, it has reversed to some extent. Corrections in the past have occurred both through prices in the rest of New Zealand catching up to those in Auckland, and by Auckland house prices declining to levels more consistent with those elsewhere.”

Link: January 2016 Bulletin

Attribution: Bank release.

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Propbd on Q W16Dec15 – economy: Economists study Auckland housing, dairy

Bank economists delve in Auckland’s living spaces
Reserve Bank examines severity of dairy decline

Bank economists delve in Auckland’s living spaces

ASB Bank’s economists drilled into housing statistics in a report they released yesterday, highlighting the intensity to which Auckland’s housing stock is being used, and the region’s different preferences & circumstances.

The Home economics report was prepared by bank economist Kim Mundy: “In this paper we have drilled into the detailed composition of Auckland’s households. We have made some observations and discussed some of the potential reasons for the differences we have noticed. At the very least, we can conclude that Auckland’s housing stock has been used with a greater intensity than elsewhere, and that this utilisation has increased over time. The next step will be to see if we can econometrically account for some of the differences and, in doing so, gain some insights into the extent of Auckland’s housing shortage.”
First observations were that, in 2013, relative to the rest of the New Zealand Auckland had:

  • fewer empty/unoccupied houses
  • more people living in each house
  • more households with 2 or more families in one house (over half of the country’s total)
  • faster growth in the number of households with 3 or more people (especially households with more than 6 people), and
  • within Auckland, wards with lower median household income tend to have more people/house.

Link: Home economics report

Reserve Bank examines severity of dairy decline

A paper jointly published yesterday by the Reserve Bank & DairyNZ elaborates on the state of indebtedness of the dairy sector.

The paper’s authors – Ashley Dunstan, Hayden Skilling from the bank, Matthew Newman & Zach Mounsey from Dairy NZ – said: “Dairy sector debt increased from $11.3 billion to $29 billion between 2003-09 due to rapid increases in land prices, a flurry of dairy conversions and significant on-farm investment. This rise in debt left highly leveraged farmers exposed when milk & land prices fell sharply in 2009. A swift recovery in global milk prices subsequently helped to limit the degree of financial stress, although nonperforming loans increased to a peak of around 4% of sectoral debt.

“This experience has resulted in increased caution among dairy farmers and a slower rate of debt accumulation. However, debt levels remain at elevated levels of more than 300% of trend milk income. As at June 2015, dairy debt reached $37.9 billion, representing around 10% of total bank lending. Developments in the dairy sector are therefore an important consideration in assessing financial system risks.”

The authors said global dairy prices fell by more than 65% in $US terms between February 2014 & August 2015, due to increased global supply, sanctions on Russian imports and reduced Chinese demand following a build-up of inventories during the 2013-14 season. Over this period, the exchange rate depreciated, dampening the fall in $NZ terms. Dairy prices have since increased from August lows, but recent outturns have not been favourable and prices remain well below their long-term average.

“As a result of sustained lower milk prices, dairy farmers are currently facing significant cashflow pressures. Following a record 2013-14 season, Fonterra’s payout fell considerably and farmers are now expected to face consecutive sub-$5/kg of milk solids payouts. The impact of the low payouts is amplified by an increase in average break-even payouts since the 2006-07 season, reflecting increases in debt levels and a shift to more cost-intensive operating structures.

“The worst cashflow pressures are expected to emerge in the current season (2015-16), compounded by low retrospective payments from the 2014-15 season. The cashflow shortfall for the average dairy farmer is estimated to be more than $1/kgMS (based on DairyNZ forecasts of $4.15 for effective milk revenue, taking into account the latest Fonterra forecast for the headline payout).”

Despite the cashflow pressures, the authors said dairy farm land values had been supported by low interest rates and a largely positive long-term outlook for the payout. The Real Estate Institute’s dairy price index continued to grow at about 10%/year throughout the summer of 2014-15. However, land values had recently shown signs of weakening, on limited sales volumes.

“There is a risk that land values could fall if cashflow pressures persist, especially if confidence in the longer-term milk price outlook deteriorates. Downward price movements could be amplified by reduced liquidity in the farm market, if demand to purchase farms falls alongside the increased risk of rising stressed sales. The extent of financial system losses in this scenario hinges critically on how debt is distributed within the dairy sector.”

Link: Reserve Bank Bulletin

Attribution: Bank releases.

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Council economist lists potential housing price solutions

Critics of rising Auckland land costs for housing have long pointed to the line between allowed development and the no-go greenfield territory beyond (the hated & despised metropolitan urban limits) as the lead factor in forcing prices up – not just for peripheral land but throughout the region, and flowing into overall housing costs.

Secondly, where the development & construction sectors haven’t been heavily regulated they have shown an abysmal ability to perform well. You can criticise administrators for over-zealously creating more regulation, but those rules have been a response to failure.

The first of these is a cost which can – and will soon – be remanipulated. The second is mostly a cost which begins with ensuring quality in construction, and can end there if the industry demonstrates that self-regulation works.

The most expensive factor in skyrocketing house costs is the land value, but the difficulty in acquiring peripheral greenfields hasn’t been the main problem. Builders go to the periphery when something more accessible isn’t available.

What’s more important is the ability to revisit areas built on in earlier eras, to intensify land use in the inner suburbs. Making it possible to remould existing suburbs through site aggregation & consequent intensification – which Housing NZ has experienced great frustration in trying to achieve for well over a decade – would already have forced widespread land revaluation years ago, and that’s without considering the function of heritage protection.

It’s within the power of the independent panel hearing submissions on Auckland’s unitary plan – and, next year, delivering its recommendations to the council – to propose zoning which will allow more widespread redevelopment. That doesn’t mean highrises will spring up along every suburban street, but it would offer developers & builders a far wider choice of properties, and that greater competition among potential suppliers would change the price.

This prospect is alluded to in a paper released on Wednesday by Auckland Council chief economist Chris Parker, Housing supply, choice & affordability: Trends, economic drivers & possible policy interventions.

Including 2 summary lists in the executive summary at the front, the paper runs to 101 pages. But a quick glance through those 2 lists alone will give you an idea of the many potential courses that can be followed – some conflicting with each other, but the purpose wasn’t to deliver a single comprehensive solution.

Down in the depths of the paper, Mr Parker (and the many high-level contributors to his work) gets into questions on barriers to intensification of the inner suburbs such as viewshafts. The Mt Eden viewshaft alone is estimated to have a net cost as high as $440 million.

In his summary of priorities to attack, he starts with increasing greenfield land supply, followed by permitting more intensification via the unitary plan.

He has listed 34 tools to address Auckland house prices – marking them with hammers & megaphones and colour-coding with greens, blues, yellows & reds. Among the reds is giving a gst exemption to owner-occupiers who commission new homes: “Do nothing,” he says, “any exemption is equivalent to awarding a government subsidy of the same amount, which would likely not be the best use of funds.”

Another red megaphone is awarded to restricting immigration. Mr Parker points out that immigration supports growth & economic development, restricting it could exacerbate a shortage of construction skills, and it could fall quickly anyway.

In his paper, Mr Parker says a reduction in Auckland’s median house price to median household income multiple, from the current 9-10 down to 5, might be achieved over the next 15 years if a concerted effort was made to follow recommended strategies – primarily by reducing costs of housing delivery and increasing the scale & breadth of housing options for the bottom half of the market.

An important point he makes concerns the house price median. It’s been rising as more $1 million-plus houses are built and new stock in the bottom price bracket has declined. Without preventing expensive new housing, the median can be cut simply by building more cheaper homes. A key to that is land price, and a vital accompanying factor is holding other household costs down, such as commuting.

Mr Parker was asked by mayor Len Brown & deputy mayor Penny Hulse to analyse Auckland’s housing affordability problem, identify causes and give preliminary advice on a long list of possible solutions.

“The scope of solutions considered is wider than just the council – it includes the Government, industry & the community. This is to give a more holistic understanding of the issue & solutions, and scope for collaboration & influence.”

Leading the root causes of unaffordability was the market signalling the need to transform the housing stock to accommodate as many as one million more people over the next 30 years. Demand drivers included natural population growth, strong migration, low interest rates, investor confidence & tax incentives.

Planning constraints were at to the top of the list of supply issues, followed by design requirements (as you can see above, I think this one is an excuse rather than a real cause), low construction productivity, fragmented land ownership & infrastructure needs.

Mr Parker has recommended the council work with the Government to jointly adopt an aspirational housing affordability target: “This would help to guide the development of policies, plans, regulations etc that may relate to housing supply, either directly or indirectly.”

But there are plenty of people in the property sector who will point to policies, plans & regulations as a root cause of cost rises, and they’ll be highly averse to a new round of them. Better, you might think, for a change in land pricing to flow from the tick of a zoning recommendation, reducing the need for intervention and heightening the chance of prices finding a natural level.

Links: Chief economist’s paper
Chief economist delves into Auckland housing
Action on price-to-income ratio the key issue for housing affordability, says chief economist
In depth: What’s fuelling Auckland’s house prices?

Attribution: Council paper, briefing.

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