Has the Auckland house market finally detached itself from all sense of reality, or are we seeing a big last flurry of action before reality really bites?

By David Hargreaves

One of the more interesting pieces of 'advice' I received in my cub reporter's days came from a senior news executive at the daily newspaper I was working on.

I had (no doubt, inexpertly) fashioned a news article from a Statistics NZ press release and submitted if for publication. The news executive invited me to his desk and gently inquired as to what the hell I was on about. I attempted to explain my literary offering, at which point a look of blind panic crossed his face and he blurted out: "Well, don't try to interpret the figures!!!"

Which, in a nutshell, probably explains a lot of what has been wrong with New Zealand journalism over the years. You see, statistics are meaningless without interpretation.

When, however, you see a set of statistics that defy interpretation, or offer differing potential interpretations, well, it is a bit of a problem.

'What the?'

What then to make of the latest Reserve Bank release detailing borrowing/lending figures for May? The figure of most interest to the RBNZ, which is very interested in these figures, would be the 0.7% seasonally-adjusted monthly rise in "total household claims" - that's mostly mortgages, but also includes consumer credit.

The 0.7% increase was the strongest since February 2008, at the tail-end of the last housing boom, and just before the Global Financial Crisis.

Rapid rises in personal indebtedness worry the RBNZ, since if Kiwis start getting stretched financially then so their personal financial woes could become a very serious financial stability issue for the country. Imagine in the ultimate armageddon scenario all of, say Mr ANZ's customers suddenly defaulting on mortgage commitments and ask yourself: What would that do for the health of Mr ANZ and by implication his big Australian friends?

The current rate of credit growth, while high by recent standards, is of nothing when compared with past times. In the early-to-mid-2000s monthly growth rates of 1.5% were seen on occasion. But that doesn't mean that a rise now isn't a worry.

Not the whole picture

And the RBNZ has been of the view that the recent overall figures have not necessarily been painting the whole picture. It reckons that many people have since the GFC been aggressively paying down debt - and this has rather obscured the fact, in terms of overall credit figures, that others have been aggressively TAKING ON debt.

Couple this with the very much linked heating-up of the Auckland housing market and we get an RBNZ ready to, first, goad the Government into some belated action, and then unveil its own measures, followed in short order by the Government finally joining in.

The fact that these measures are all not due to kick in till October 1 has left plenty of room for conjecture over what will happen. Will the measures work? Will people be put off buying houses ahead of the October 1 date for fear of what might happen to the housing market subsequently? Will people climb in to the Auckland market with extra oomph before October 1 to get in ahead of the changes?

To go back to the release of the May borrowing/lending figures then, these might tell us nothing and they might tell us everything. What we can see is that mortgage lending surged in May. So, this is people climbing in before that October 1 start date?

Running hot

Well, problem is, the RBNZ measures were announced on May 13 and the Government measures were announced on May 18. And the mortgage figures were running hot before either of those announcements. Maybe people anticipated action and thought they would climb in.

Or maybe what was happening was happening anyway, IE, simply a big rise in house buying activity as Auckland fever takes hold, therefore vindicating the RBNZ's moves.

The RBNZ's weekly 'experimental' series tracking weekly mortgage approvals shows that the mortgage market continued to run unseasonably hot through June. Last week's grand total of $1414 million loaned was some 28.8% higher than in the equivalent week a year ago.

So, one thing you can say is that Auckland house buyers are not being put off buying, ahead of that October 1 start date.

But if we can perhaps say that the May mortgage market was going to be strong anyway, what about the continued super-strong figures in June, running into the heart of winter? Now, maybe we are seeing some signs of people rushing to beat October 1. I would be reluctant to make that definitive call, however, given how strong the market had been before. It is possible we are still just seeing a continuation of the up-up-and-away Auckland market thinking.

Interest rate cuts

The other big factor that has come into play since May has been the RBNZ's move as of June 11 to start unwinding the four interest rate hikes it undertook last year largely because of the very sharp fall in global dairy prices and consequent impact on our terms of trade. After the further sharp falls in dairy prices this week it is a very fair bet that our official interest rates will be dropped back down before the end of the year to the historic lows of 2.5% seen prior to the hikes last year.

So, now we have a falling interest rate environment helping to feed a rising Auckland house market - a non-virtuous circle if ever there was one. The RBNZ people will be holding their breaths that the new measures work.

I suspect, though I don't know, that people are now convinced they need to get into the Auckland market regardless, with perhaps the October 1 cut-off date and the lure of lower interest rates providing an intoxicating 'act now, think later' combination.

That's a worry, because I think the new measures might have more impact than many people believe. And it could be that the housing market will wake up in a very grumpy mood come October 1.

All-night house party

So, we could right now be looking at the "never mind about tomorrow" all-night party from hell followed by the mother of all hangovers. It could be a very cool summer in the Auckland housing market this year. I think much will depend (probably, ironically, given the debated nature of it) on how well foreign buying interest holds up. But with our Government now signalling  a cooler approach to foreign buyers and the global economy looking uncertain (don't think Greece - the slowing Chinese economy is a much bigger worry for us), foreign buying interest may actually start to dry up as well.

I think the twin Government/RBNZ measures are going to work. Oh, they'll work. The bigger challenge might actually be to keep on top of how quickly our economy is going off and be prepared to actually loosen - particularly the RBNZ measures - if come say December it looks as though the Auckland market is really turning in an adverse way.

Fasten your seatbelts, this looks like an interesting trip.